DANUBE UNIVERSITY KREMS

EMPLOYMENT RELATIONS IN THE EUROPEAN AIRLINE INDUSTRY

EFFECTS ON COMPETITIVE ADVANTAGE

MARTIN STORK

MASTER THESIS

II TITLE: EMPLOYMENT RELATIONS IN THE EUROPEAN AIRLINE INDUSTRY. EFFECTS ON

COMPETETIVE ADVANTAGE

Master Thesis for obtaining the academic grade

Master of Business Administration (MBA)

At the University of Continuing Education - Danube University Krems

11th Professional MBA Aviation

Submitted by

Martin Stork

1. Advisor:

Prof. Dr. Pablo Collazzo

Visiting Professor Strategy and Innovation, Vienna University of Economics and Business,

Vienna, Austria.

2. Advisor:

Prof. Dr. Christopher Kummer

Faculty Member at Webster University in Vienna, Austria

Associated Faculty of the Microeconomics of Competitiveness Network,

Institute for Strategy and Competitiveness, Harvard Business School

Vienna, 31.08.2014

III Abstract

Twenty years ago it was inconceivable that airlines were going to outsource their pilots to external crew-leasing providers. When low-cost airlines emerged, they began to introduce these measures in line with their cost-leadership strategy. Today it has become common practice in the airline industry to outsource pilots via crew-leasing agencies and to utilize their services on a non-permanent employment basis to reduce fixed costs and gain greater flexibilities in terms of capacity management. The results are increasing tensions between pilot-unions and management, but also on the individual pilot-management level. Consequently, employment-relations are affected within this environment. The decay in employment relations not only resulted in lower levels of job satisfaction, but also in reduced motivation and commitment of pilots. What has gone unnoticed by airline management is the fact that under these circumstances pilots not only reduce their efforts for operational efficiency, they even show a tendency to follow "work-to-rule" principles. Since pilots are in direct control of fuel, the largest operational cost factor for airlines, reduced operational efficiency efforts and work-to-rule methods directly result in increased opportunity costs for airlines. The Master Thesis addresses these issues and analyzes high-performance work systems together with high-road employment relations as possible solutions. The research for this Master Thesis has revealed that airlines who approach their pilots as assets, instead of an outsourceable cost item, are likely to gain competitive advantage over their competitors.

IV Preface

The author´s experience in the airline business includes many years as permanent and contract pilot. Especially during the last decade, changes in the industry associated with increased outsourcing strategies could be observed. Pilots began to express their concerns about how new employment strategies affected their private lives and their job satisfaction. The tendency of airlines to avoid unions and collective bargaining became more apparent as well. What used to be a partnership seemed to have turned into a confrontation, affecting the personal relationship between pilots and their airlines. It became obvious to the author that his colleagues were not willing anymore to put the same efforts into operational efficiency as they used to do. It was disappointing to witness highly-experienced aviators to operate aircrafts less efficiently than they were able to, simply because of lost motivation and commitment towards their companies. The author would like to point out that a partnership approach between pilots and airlines, which supports high-road employment relations, is still a valid option to achieve competitive advantage in line with increased levels of cost efficiency.

Moreover, the author would like to thank Prof. Dr. Collazzo for his constant support during the process of writing the Master Thesis and Prof. Dr. Kummer for his oversight regarding formal requirements. Further words of thanks go to Mag. Dr. Doris Burger and Michaela Aschauer from the Danube University for their assistance on the administrative side of the Master Thesis. Many others provided their support to distribute the survey to airline pilots all over Europe. Unfortunately, these individuals cannot be named due to possible reprisals on behalf of their airlines. Hopefully, the findings of the Master Thesis constitute a starting point for airline managers to reconsider current outsourcing practices and their effects on employment relations and competitive advantage.

V Table of Contents Abstract...... IV Preface...... V Index of Abbreviations...... VIII Executive Summary...... IX 1 Introduction...... 1 1.1 Airline Cost Structure...... 5 1.2 Operational Cost Drivers...... 5 1.2.1 Extra Fuel versus detailed Preflight Planning...... 5 1.2.2 Delay versus On-Time-Performance...... 6 1.2.3 Unforeseen Circumstances versus Crew Flexibility...... 8 1.3 Relevance of the Study...... 9 2 Problem Definition: Competitive Strategy and the Airline Industry...... 11 2.1 Competitive Forces...... 12 2.1.1 Threat of Entry...... 13 2.1.2 Barriers of Entry...... 13 2.1.3 Power of Suppliers...... 15 2.1.4 Power of Buyers...... 15 2.1.5 Threat of Substitutes...... 16 2.1.6 Rivalry among existing Competitors...... 16 2.1.7 Industry Structure...... 17 2.2 Competitive Strategy and creating Competitive Advantage...... 18 2.2.1 What is Competitive Strategy?...... 18 2.2.2 Industry Analysis...... 19 2.2.3 Strategic Positioning...... 19 2.2.4 Activity Systems...... 20 2.2.5 Strategic Fit...... 21 2.2.6 Added Value...... 22 2.2.7 Operational Effectiveness...... 22 2.2.8 Trade-Offs...... 23 2.2.9 Stretch and Leverage...... 24 2.3 Competitive Strategy in the Airline Industry...... 26 2.3.1 Competitive Forces in the Airline Industry...... 26 2.3.2 Strategic Positioning of Airlines: Business Models & Trade-Offs...... 29 2.3.3 Activity Systems and Strategic Fit: How airlines differentiate themselves...... 32 2.3.4 Airline Cost Competition...... 34 2.3.5 Outsourcing Strategies in the Airline Industry...... 37 2.3.6 Employment Relations and Airlines: Are employees more than cost factors?...39 2.4 Competitive Advantage through People: An Opportunity for the Airline Industry?....44 2.4.1 Airline Pilots: A valuable resource?...... 45 2.5 High-Performance Work Systems: Tools to achieve competitive advantage...... 47 2.5.1 Employment Security...... 47 2.5.2 Sharing of Information...... 47 2.5.3 Job Satisfaction and Employee Motivation...... 48 2.5.4 Work-Life Balance...... 48 2.5.5 Sustainability...... 49 2.6 Structuring of the Problem: Effects of Outsourcing on Employment Relations...... 50 2.7 Research Question...... 53 2.7.1 Relevance of the Research Question to the Airline Industry...... 54 2.7.2 Supporting Hypotheses...... 54

VI 3 Research Methods...... 56 3.1 Quantitative Research Tool: Survey...... 56 3.2 Survey Design...... 57 3.2.1 Survey Question Design...... 57 3.2.2 Survey Question Structure...... 58 3.2.3 How the survey addresses the research question...... 60 3.2.4 Target Group and Distribution Methods...... 60 3.2.5 Challenges: Data Collection...... 61 3.2.6 Anonymity and Data Security...... 61 3.2.7 Methods of Data Collection...... 62 3.2.8 Survey Limitations...... 62 3.3 Survey Results...... 62 3.3.1 Survey Characteristics...... 63 3.3.2 Statistical Data...... 64 3.3.3 Working Environment...... 67 3.3.4 Work - Life Balance...... 67 3.3.5 Pilots´ Terms and Conditions...... 68 3.3.6 Union – Management Relations...... 68 3.3.7 Employment Relation from the Pilot Perspective...... 69 3.3.8 Communication and Joint Decision-Making...... 71 3.3.9 Job Satisfaction and Effects on Operational Efficiency...... 72 3.3.10 Affected Areas of Operational Efficiency...... 73 3.4 Data Analysis...... 76 4 Discussion of Findings...... 77 4.1 Effects of Outsourcing on Employment Relations...... 77 4.2 Employment Relations based on Employment Status...... 80 4.3 Employment Relations and possible effects on Operational Efficiency...... 83 4.4 Operational Efficiency: Affected Areas...... 85 5 Conclusions...... 87 5.1 Theoretical Implications...... 87 5.2 Managerial Implications for Airlines...... 88 5.3 Utilizing Employment Relations to improve Competitive Advantage...... 89 5.4 Limitations and Future Research...... 90 6 Summary...... 90 7 Appendix A – Survey Findings: Figures...... 91 8 Appendix B – Survey Data: Summary of Data Sets...... 98 9 Bibliography...... 99

VII Index of Illustrations Figure 1: Porter´s Five Forces...... 12 Figure 2: Southwest Airlines´ Activity System...... 33 Figure 3: Airline Operating Costs, by Region of Airline Registration...... 34 Figure 4: Adjusted cost per available seat kilometer for European Airlines 1997-2004...... 35 Figure 5: Effect of outsourcing on permanent pilots...... 77 Figure 6: Union-Management Relations...... 79 Figure 7: Pilot-Management Relations...... 79 Figure 8: Pilot associated terms with employment relations...... 81 Figure 9: Influence of employment relations on job satisfaction...... 81 Figure 10: Commitment of pilots at work versus employment status...... 82 Figure 11: Pilots´ ambitions to pursue new job opportunities...... 83 Figure 12: Pilots´ job satisfaction versus operational cost saving efforts...... 84 Figure 13: Work-to-Rule concept versus perceived employment relations...... 85 Figure 14: Operational Efficiency: Affected Areas...... 85 Index of Tables Table 1: Low-Cost versus Full-Fare Airline Activity Systems...... 32 Table 2: Survey Characteristics...... 63 Table 3: General Statistical Data: Type of Participants...... 64 Table 4: General Statistical Data: Airline Types...... 65 Table 5: Statistical Data: Employment Status...... 66 Table 6: Union Status...... 66 Table 7: Working Environment...... 67 Table 8: Work - Life Balance: Company Support and Roster Stability...... 67 Table 9: Work - Life Balance: Pilots´ Efforts to balance work with personal life...... 68 Table 10: Pilots´ Terms and Conditions...... 68 Table 11: Union - Management Relations...... 69 Table 12: Employment Relations defined by pilots...... 69 Table 13: Pilots´ assessment of pilot-management relationships...... 70 Table 14: Communication and joint decision-making...... 71 Table 15: Effects of job satisfaction on operational efficiency...... 72 Table 16: Willingness to work on free days...... 73 Table 17: Operational Efficiency: Affected Areas...... 76

VIII Index of Abbreviations ALPA American Pilot Pilot Association

CASK Cost per Available Seat Kilometer

ECA European Cockpit Association

ER Employment relations

EU European Union

HRM Human Resource Management

LFA Low Fare Airline

OE Operational Effectiveness

USD United States Dollar

OTP On-time Performance

Q Survey Question

TNC Trans-National-Corporation

IX Executive Summary

This Master Thesis addresses outsourcing of permanent pilot positions and its effects on employment relations between pilot unions and airline management in European Airlines. The Master Thesis is extending the term of employment relations to include the relationship between permanent pilots and non-permanent "contract" pilots with airline management on an individual level. Does the quality of employment relations have an impact on pilots and how they pursue operational saving efforts during their daily duties? In turn, do airlines face an impact on opportunity costs, depending on the willingness of pilots to go the extra mile in terms of operational cost savings? Ultimately, competitive advantage of airlines depends to a large extent on operational efficiency as competition in the industry is predominantly based on price, which necessitates a lean operational cost structure.

Price competition is owned to the fact that competitive forces in the airline industry are strong. When the EU introduced regulations in favor for an open EU aviation market, low- cost carriers began to emerge. Their business model is predominantly based on price. Incumbent air carriers had to follow suit in order to compete and protect their market share. On the supplier side airlines have to deal with monopolistic structures associated with ground- and passenger handling, air traffic control and airport operators. Also, the airlines´ influence on fuel price is rather limited. Therefore, expenses for labor are one of the only costs that managers can directly control. Consequently, pilots and their unions are subject to frequent attempts by management to reduce associated employment conditions. As mentioned earlier, these pressures are reflected by the quality of employment relations between the different parties. What airlines seem to overlook is the fact that they put the greatest pressures for cost reductions onto a group of key players (pilots), who are in direct control over the airlines´ largest operational expense (fuel).

So far, the airline industry does not seem to venture into alternative business models as suggested by the blue ocean approach. Instead, airlines are likely to follow generic strategies to compete. Either they differentiate in terms of service or they follow the low- cost model. In both cases, being highly cost efficient is essential.

X As already discussed, labor costs receive great attention from aviation managers. In this area, managers have only few choices available: The first option is to continue outsourcing of pilots to circumnavigate unions and collective bargaining efforts where applicable. In some EU countries direct outsourcing attempts are limited due to restrictions in local labour law. In these countries, airlines tend to create subsidiaries to employ pilots on lower terms and conditions but still on a permanent basis. Overall the aim of airline management is to gain greater flexibility in employment terms and operational requirements. Managers would prefer to have greater control over adjusting crewing needs to seasonal demands, enforcing unpaid-leave when needed or simply transfer pilots between bases without obligations to consult with unions beforehand. Airlines that are able to utilize direct outsourcing through external crew leasing agencies can save ancillary wage costs since paying social security contributions is only a requirement for permanent employees. When airlines are not longer the direct employer of pilots, they do not have to cover these items. All these measures involve negative employment relations and the unpredictable risk of increased operational opportunity costs which have the potential to exceed any anticipated saving in labor expenditures.

The other option to achieve lower operating cost is to invest into long-term labor strategies by implementing high-performance work systems in line with high-road employment relations. This approach would allow companies to gain efficiencies through higher levels of employee productivity, loyalty, commitment and greater operational cost saving efforts by pilots. As it will be shown later in the Master Thesis, high-performance work systems convert pilots into valuable resources. Furthermore, it takes time to implement these systems successfully. Therefore, these measures are harder to copy by competitors. Airlines that choose this strategy are likely to be one step closer in gaining competitive advantage as the majority of airlines do not make use of these highly effective tools to engage their flying workforce.

The applied research methods of the Master Thesis consisted of an in-depth literature research concerning employment relations and competitive strategy. With these theories in mind, their impact on the airline industry was further analyzed. The research question, its sub-question and associated hypotheses were derived from these theories. Thereafter the survey was constructed to test the hypotheses and gain data to answer the research question respectively.

XI The survey generated 222 primary data sets. Based on the gather data, outsourcing of airline pilots and its effects on employment relations were investigated. Particularly, the research analyzed how contract- and permanent pilots were affected differently by the quality of employment relations. Thereby the focus was placed on operational efficiency.

Through the analysis of the survey, all hypotheses were confirmed. Outsourcing of pilots does effect employment relations and in turn operational efficiency. Especially fuel costs and on-time-performance were affected. The result of rising opportunity costs should be reason enough for airline managers to reconsider the strategy of outsourcing core competencies, such as pilots, to external service providers as competitive advantage is negatively affected.

XII 1 Introduction

The aviation market of the European Union (EU) used to be characterized by state-owned airlines and bilateral agreements. The latter regulated traffic rights, route capacities and fares between different member states. Due to their monopoly position state carriers were not subject to considerable competitive pressures. When the EU started liberalization efforts to create an open aviation market, competitive pressures started to rise as privately owned low-cost carriers began to emerge (Doganis, 2006, pp. 159–170). Based on their strategy of cost leadership, low-cost airlines entered into direct competition with traditional network carriers (Blyton, Lucio, McGurk, & Turnbull, 2001). Airlines have to deal with high fixed costs (Doganis, 2002, pp. 75–100; International Air Transport Association (IATA), 2006). These fixed expenses include labor costs (basic salaries for crews & ground personnel), costs for aircraft ownership (financing or leasing), aircraft maintenance and infrastructure expenditures (e.g. hangar and office space) (Doganis, 2002, pp. 93–100). On the variable side the costs consist of fuel, productivity pay for crews (variable salary part), crew hotels and crew transport, landing fees, handling costs, catering and ad-hoc maintenance events (Doganis, 2002, pp. 93–100). The high fixed costs are the reason why airlines are regularly facing slim profit margins. Especially an increase in labor or fuel costs can quickly lead to a negative result on the bottom line. Therefore, cost control is vital in the aviation business. A lean cost structure in terms of fixed costs and operating expenses is necessary to stay competitive. Due to the nature of the airline industry, air carriers have to deal with powerful suppliers (Porter, 2008, pp. 82–83). Fuel prices depend largely on oil price; air traffic control fees are dictated by air navigation service providers; landing fees are controlled by airport operators and handling fees are setup by ground service companies. Therefore, aviation managers have limited influence on their operating costs in these areas (Doganis, 2002, pp. 106–115). As it is generally accepted, the largest operating expense item for airlines is fuel, directly followed by labor. Unlike fuel, labor costs can be directly influenced by aviation managers and this prerogative has been used frequently in different ways to limit labor expenditures as much as possible (Doganis, 2006, pp. 118–146). To limit these costs, airline managers have applied different strategies in dealing with unions in line with outsourcing of jobs or services to external suppliers (International Air Transport Association (IATA), 2006; Rutner & Brown, 1999).

1 The process of labor cost reduction frequently creates tensions between management and employees. Workers are commonly, but not always, represented by their respective unions. The relationship between unions and management is formally known as Employment Relations (ER) (Cappelli, 1985). The direct effects of employment relations are not limited to union-management relations. Research has shown that the quality of employment relations can also affect job performance of individual workers or groups of workers within companies (Blyton et al., 2001; Broughton, 2005). The author extended the definition of employment relations for this Master Thesis to cover the relationship between pilots and management outside the union environment. This approach allowed the author to investigate the direct influence of the pilot-management relationship in the context of operational efficiency and competitive advantage. Within labor costs, managers have targeted pilots´ employment terms as an opportunity to reduce fixed costs since pilots´ salaries are in general higher than those for cabin crew. In order to achieve greater freedom in aligning pilot terms with airline business models (e.g. low-cost) and to circumnavigate pilot unions, airline managers have adopted several outsourcing strategies. In order to reduce the impact of crew salaries on fixed costs, one aim of airline managers is to increase the productivity share of pilot salaries (e.g. payments per flight hour), thereby increasing the variable salary part. Reducing labor costs by increasing productivity and flexibility is based on employing pilots on either short-term contracts or through outsourcing via external crew leasing agencies. By employing "contract pilots" outside of collective union agreements, managers receive greater freedom in designing the salary structure according to their needs by increasing the amount of productivity pay while reducing basic salary simultaneously (O’Sullivan & Gunnigle, 2009). In extreme cases, pilots do not earn any basic salary, and they are only paid for the hours they fly. To achieve a higher payout at the end of the month, contract pilots need to fly more hours which leads to an increase in productivity for the airline. Furthermore, periods of sickness, holidays or no assigned flying duties lead to a cutback in payments and in particular pilots with "pay-by-the-hour" contracts are facing low salaries during these times (BALPA, 2012). The outsourcing strategy implies that the supply of qualified pilots is greater than the demand by the airlines. Otherwise, not many pilots would be willing to accept these terms. Even though the airline business is a very cyclical industry, and experienced pilots are commonly in demand somewhere in the world, airlines can still find pilots to accept lower terms. For junior pilots, it is very difficult to find work directly after leaving flight school. Other pilots might want to move from a turbo-prop to a jet, change

2 from short-haul to long-haul or simply fly a wide-body aircraft. However, pilots are only allowed to operate individual aircraft types (e.g. Boeing B737) after they have completed additional training. These training courses are expensive (B737 ca. 25.000-30.000 EURs). An increasing number of airlines expect pilots to pay for these training courses themselves, if they are not already qualified "on type". Another option for airlines is to provide the training, but the pilot is asked to sign a training bond. These bonds require the pilot to reimburse the airline for the training costs if the person decides to terminate the contract with the airline within a particular time frame. If an airline provides training, the pilots might be inclined to take a position as contract pilot only to gain the type qualification and operating experience on this aircraft. These reasons shed some light on why managers gain greater bargaining power over contract pilots than over their permanent, unionized and already type-qualified counterparts. Another strategy to gain greater control over pilot terms is called "Flags of Convenience". Similar to the shipping industry, airlines create subsidiaries in different countries to gain advantages in taxation, traffic rights and applicable labor laws (Lille, 1999). Thereafter airplanes are registered through the subsidiary in order to benefit from these advantages. To get a better understanding of this strategy, consider the following example from the airline industry. A Norwegian low-cost airline registers its long-haul aircrafts via its subsidiary in Ireland to obtain traffic rights to the United States and the pilots are hired through an external crew leasing agency on Singaporean employment contracts (Bhaskara, 2014). Another outsourcing example is an Irish low-cost airline. Over 70% of its pilot corps are self-employed contractors, who are forced to create their own companies and lease their piloting services back to the airline (Ryanair Pilot Group, 2014). In both examples, the pilots have no direct connection with the airline itself, except that they are operating the airlines´ aircrafts for the limited duration of their engagement. For the remainder of the thesis, all pilots without direct employment by their airline, will be referred to as "contract pilots". From the airlines´ perspective, these strategies pose significant advantages. Collective bargaining attempts by unions are hindered and labor laws are circumnavigated (O’Sullivan & Gunnigle, 2009). Therefore, salary costs can be kept at low levels without being threatened by industrial actions. Additionally, airlines face no obligations for social security payments, since contract pilots are not considered to be direct airline employees. Furthermore, airlines gain high flexibility to adopt staffing levels associated with seasonal fluctuations, since workers´ services can be easily terminate or added. For contract pilots, these factors have the opposite affect. Job security is non-

3 existent, social security matters are solely up to the pilots themselves and their employment terms are constantly subject to review. Consequently, job satisfaction of contract pilots is likely to be affected in such an environment.

Nevertheless, permanent pilots at flag carriers are facing similar challenges. Their management is establishing subsidiaries to achieve lower labor cost (e.g. Germanwings is the low-cost airline of Lufthansa and Tyrolean for Austrian Airlines). Simultaneously, the parent company benefits from economies of scale through usage of group resources (e.g. flight planning systems, maintenance, joint aircraft acquisitions). Even though this case is considered not as severe compared to the flag of convenience example, the effect is the same: Employment relations are affected since pilot remuneration at the subsidiary can be kept lower compared to the parent company (Barry & Nienhueser, 2010). Permanent pilots and their unions view this as a threat to their terms and conditions (Bamber, Hoffer Gittell, Kochan, & von Nordenflycht, 2009).

In order to address all these issues in a logical order, the Master Thesis is structured as follows:

Chapter One provides an overview of the European Airline Industry, its underlying cost structure and labor cost cutting by airlines. Furthermore, operational cost drivers for airlines are covered and which role pilots play in association with operational efficiency. In order to gain deeper insights in competitive advantage, Chapter Two provides fundamentals concerning competitive strategy. Since pressures on labour costs lead to strategic outsourcing of pilot positions by airlines, employment relations are affected. After providing insights on how outsourcing affects employment relations, the formulation of the research question and its hypotheses is conducted at the end of Chapter Two. To answer the research question, the author designed a survey for airline pilots. Chapter Three covers the survey as research method, how it was designed and which procedures were applied for data collection and analyzation. The end of Chapter Three presents the results of the survey. Chapter Four discusses the findings from the data collection and analyzation of the survey. Chapter Five covers the conclusion by discussing the implications of the research findings and research-related limitations. Chapter Six reviews the Master Thesis in terms of a summary.

4 1.1 Airline Cost Structure

As noted earlier, airlines have to deal with high levels of fixed costs. The amount of fixed costs depends on the airline business model. Network carriers have higher costs than low- cost carriers following the cost-service trade-off logic. Nevertheless the higher costs of network carriers should result in higher premiums for providing greater levels of service than their low-cost competitors. On long-haul flights network carriers have more options to differentiate their products in terms of service (e.g. flat beds, mini-suites) and only a few low-cost carriers (e.g. Norwegian Air International) have started attempts to compete with network carriers on long-haul markets. Nevertheless on their short-haul routes, network carriers face direct low-cost competition, since the value proposition in this segment is even more standardized, marking it very difficult to differentiate their short-haul product (Lawton, 2003). The result is a slim profit margin, especially in short-haul markets, and airlines are forced to improve efficiency to keep their profit margin. As noted earlier, the largest operational cost driver is fuel. Airlines have the option to limit fluctuations in fuel price through fuel hedging. Nevertheless fuel hedging carries additional costs and does not provide total protection from large price fluctuations (Cobbs & Wolf, 2004). Further operational cost drivers are delays and crew utilization. Therefore, airlines are focussing on reducing delays and increasing productivity of their pilots (Doganis, 2002, pp. 115–120; International Air Transport Association (IATA), 2006, 2010). All three cost drivers will be discussed in more detail in the next section.

1.2 Operational Cost Drivers

Operational performance is crucial for airlines to achieve low operating costs. Hence, operational cost drivers need to be addressed.

1.2.1 Extra Fuel versus detailed Preflight Planning

One group in particular has the ability to influence the efficient operation of the aircraft: The pilots. A less efficient pilot carries the potential to create additional costs for the airline. These opportunity costs are hard to track for airline managers since some of them are created through omitted actions. For example, a pilot could actively try to negotiate a shorter routing with air traffic control resulting in fuel- and time savings for the company. If

5 the pilot decides not to engage in route negotiations, an eventual saving opportunity for the company is lost. Furthermore, pilots have the final authority to decide how much fuel they would like to carry on a particular flight. For each flight, a minimum amount of fuel is calculated according to legal requirements. Uplifting of extra fuel on top of this legal minimum creates further costs, since the additional fuel weight increases the total fuel burn. To find the right amount of extra fuel for each flight many factors have to be considered and therefore additional efforts from the pilots are required. On the other hand, it is easier for pilots to always add a fixed amount of additional fuel, irrespective if it is needed or not. The larger the additional uplift, the more likely it will cover all unexpected circumstances. So if pilots are not willing to make the effort of evaluating each flight individually for extra fuel requirements, the fuel costs for the airline can rise considerably. In the case of Lufthansa, one kilogram less weight on all its airplanes saves 30 tons of fuel per year (Lufthansa, 2012). This number is based on the total amount of flights for the whole Lufthansa fleet per year. At an assumed fuel price of $120 US dollar (USD) per ton, Lufthansa´s fuel costs would increase by $1.8 Million USD per year if each flight would carry 500kg of extra fuel1. Therefore, it is crucial for any airline that pilots perform detailed calculations for each flight to evaluate additional fuel requirements. Pilots could even go one step further. Regulations require that flights carry sufficient fuel to reach an alternate airport if it is not possible to land at the destination. Under certain circumstances (sufficient weather conditions, more than one runway available) at the destination, the regulations allow to dispatch a flight without alternate and therefore carry less fuel (International Civil Aviation Organization, 2012). This option is not used very often by pilots as it needs very careful consideration of several factors. However, if all external conditions and regulations are met and pilots have the motivation to make an extra effort to analyze each flight for this opportunity, further fuel savings for airlines can be achieved.

1.2.2 Delay versus On-Time-Performance

Delays are very costly for airlines. Based on the report of the University of Westminster (2011) concerning delay costs for European airlines, a five-minute tactical delay of a Boeing B737-800 at the gate results in additional costs of 100 EURs. 15 minutes delay cost 550 EURs, 30 minutes 2060 EURs and 60 minutes 8540 EURs respectively. Once the flight is airborne, any delay results in 240 EURs for five minutes, 970 EURs for 15 minutes,

1 500kg fuel equal roughly 12 minutes of extra flight time for a Boeing 737, based on 40kg / minute.

6 2.900 EURs for 30 minutes and 10.230 EURs for 60 minutes respectively. These numbers are based on a Boeing B737-800. Possible reasons for airborne delays can be related to flying at suboptimal speeds, holding for weather phenomena or restrictions by air traffic control. In all these situation, the pilots can influence the impact. The following examples provide some insight concerning different scenarios for delay.

Airplanes only generate revenue when they are flying. Therefore, airlines are trying to utilize their fleet as much as possible every day. In the short-haul network, it is not uncommon for airplanes to operate eight to ten flights per day. In order to cover these flights, the airline needs several crews for the same airplane, since flight time duty limitations only allow a maximum amount of consecutive duty hours per crew 2. If eight flights are planned on a given day, typically the first four are performed by crews on early shift. The remaining four sectors are operated by the crews on late shift. The pilots normally meet up 45 minutes to one hour before the scheduled departure of the first flight of their duty period. This time is called check-in time and is set by the airline. Within this time frame, the pilots need to consider fuel requirements, brief the cabin crew, check the technical status of the aircraft, complete the cockpit preparation and initiate the boarding process. Hence, it is expected by the airline that crews show up earlier than officially required. It is common knowledge that the provided time frame from checkin to departure is not enough to prepare the flight properly, but airlines do not want to waste duty time by providing earlier check-in times. If crews do not show up ahead of the check-in time, departure delays of five to ten minutes are highly likely. Since flight rotations are planned with quick turn around times (e.g. 20 minutes in the low-cost sector are not uncommon), a five-minute initial delay for the first flight of the day can build up to considerably longer delays for the remaining sectors. If the late shift also arrives exactly at checkin time, the process will most likely repeat itself, and the delay is further increased. It has to be noted that these short turns are only feasible if crews are highly efficient in their line of work. Any delay that is caused by the late arrival of the previous flight is called "reactionary delay". If a flight is getting delayed due to connecting passengers, the pilots could try to make up some time in the air if they choose to fly a faster speed. Especially when airborne delays occur due to weather or air traffic control restrictions, pilots can proactively try to reduce the impact on the operation. For example, if it becomes apparent that the flight has to hold

2 Under European flight duty limitations regulations (Flight Time Limits, 2012), the maximum basic daily flight duty period is 13 hours. After the third sector, it is reduced further by 30 minutes. For the given example, the maximum flight duty period is limited to 12 hours per crew to perform four flights.

7 overhead the destination due to weather or other reasons, the flight crew could proactively choose to reduce their speed while still in cruise flight. Flying slower in cruise is more fuel efficient, than flying holding patterns at lower altitudes overhead the airport.

1.2.3 Unforeseen Circumstances versus Crew Flexibility

Unexpected changes in daily operations are quiet common in the airline industry. Therefore, airlines keep extra pilots on reserve to cover these events. Nevertheless, the amount of pilots on standby is not always sufficient to cover all operational changes, e.g. during longer periods of snowfall in the wintertime. During these events, airlines depend on pilots who are willing to work on their free days ("OFF days") and airlines provide salary incentives to encourage pilots to volunteer when needed. A similar scenario arises when the airline needs to change the duty plan of a crew member. Depending on national regulations or the collective union agreement, it is only allowed to change outlined duties of pilots within a given time frame. If a pilot is planned for the early shift, the airline cannot change this duty last minute to a late shift without the pilot´s consent, thereby depending on the pilot´s goodwill to help out. The goodwill of crews also plays an important role during unexpected delays that occur after check-in time. The Captain has the legal option to increase the daily flight duty limit by up to two hours in close coordination with the other members of the crew. This Captain´s prerogative can be the deciding factor for a delayed flight being able to return to the airline´s base, where a crew change can be performed. Therefore, the airline depends on the goodwill of the Captain, who has the final authority to increase the duty limit. These examples highlight that goodwill of pilots is an important factor in improving operational efficiency levels for any airline. What motivates a pilot to ask for shorter routings or to calculate extra fuel for each flight individually? Are financial incentives sufficient to prompt a pilot to work on a free day or to accept last-minute schedule changes? Is job satisfaction, therefore, a deciding variable for pilots to become operational cost controllers who drive efficiency levels upwards? Which factors, connected with employment relations, affect the job satisfaction of pilots in particular? This Master Thesis is addressing how employment relations affect pilots in different ways, leading to operational performance implications and ultimately involve competitive advantage. Both contract- and permanent pilots at several European airlines are part of the target group of this research in order to draw conclusions how different contractual conditions influence employment relations in the first place.

8 1.3 Relevance of the Study

Outsourcing of permanent pilot jobs is booming. A search on a website for pilot jobs revealed that out of 430 available flight crew positions eight were permanent offers, which constitutes only 1,86% (Flightglobal.com, 2014). So it seems to be obvious, which type of employment is preferred by airlines: non-permanent, contract pilots. Some airlines are more restricted than others to pursue this strategy based on their country´s type of market economy, applicable labor laws and unionizations levels. Therefore Lufthansa has fewer options available than Ryanair in this area (Barry & Nienhueser, 2010; Harvey, 2009).

Airlines apparently show little concern about outsourcing operational expertise to external suppliers. However, do airlines also take into consideration, what implications this could have for employment relations, associated operational efficiency and overall financial company performance? Significant research is available to address employment relations in the aviation industry (Bamber et al., 2009; Barry & Nienhueser, 2010; Cappelli, 1985; Harvey, 2009). Furthermore, research findings have shown that sustainable competitive advantage can be produced through the effective management of people (J. Pfeffer & Veiga, 1999). By implementing high-performance management practices that lead to greater levels of employee involvement and commitment, companies can significantly increase their economic performance. Key factors to successfully implement these systems consist of providing employment security, sharing of business related information by management, inviting workers´ participation and empowering employees by delegating responsibility (J. Pfeffer & Veiga, 1999; J. Pfeffer, 2005). Pfeffer and Veiga (1999) argue that even though academic research provides sufficient evidence for a strong connection between financial results and managerial approaches that consider employees as assets, not many companies implement high-performance work systems to achieve competitive advantage through people. Therefore, it does not come as a surprise that many airlines are not using available knowledge to improve their performance through engaging people. Instead, outsourcing strategies are continued since airlines tend to use each other as benchmarks for costs. Even though low-cost carriers operate on a different business model, network carriers utilize their cost structure as a benchmark (Blyton et al., 2001). Since costs also depend on the originating region of an airline (e.g. Asia has by default lower labor costs than Europe), an international competition towards the bottom in terms of workers´ terms and conditions is well on its way (Harvey & Turnbull, 2002).

9 A few airlines though have taken up the challenge to value their employees as a source of competitive advantage. Southwest Airlines in particular has incorporated research-related tools to engage its employees and establish positive employment relations with its workforce and their unions. The approach to value employees is reflected by mission statements, human resource management practices, employee branding initiatives and union relationships. At Southwest, for example, the human resources are referred to as people department in order to emphasize the company´s appreciation for its employees (Miles & Mangold, 2005; Rhoades, 2006; Smith, 2004). Furthermore, Southwest openly states that its employees come first and customers second. The corporate culture of Southwest is based on the understanding that the company leads by example and treats its employees the way it would like the employees to treat the customers (Rhoades, 2006). Southwest has proven that even in the airline industry with high levels of unionization, focussing on people as assets works. Southwest´s profitability record and top rankings in customer service speak for themselves (Gittell & Bamber, 2010). The purpose of this Master Thesis is to explore how competitive advantage of European airlines is affected by the use of contract pilots, leading to effects on employment relations and competitive advantage. Before airline managers start targeting labor costs, they need to be aware of all implications, which might not be apparent immediately. Outsourcing strategies affect employment relations with the potential to eliminate targeted savings of these strategies. Ultimately these actions lead to effects on competitive advantage. Several studies have shown that sustainable competitive advantage can be achieved through the effective management of people (J. Pfeffer & Veiga, 1999; J. Pfeffer, 2005; Jeffrey Pfeffer, 1998). Aviation managers should, therefore, balance the short-term effects of outsourcing versus sustainable, long-term strategies to achieve competitive advantage for their airlines. Especially Pfeffer´s (1999) key factors of successful high-performance management practices (e.g. job security, employee engagement) are analyzed within the target group through a customized survey. Based on these findings the effects of outsourcing strategies (use of contract pilots) on employment relations and competitive advantage will be discussed. The majority of aviation related research deals with employment relations on union-management level and the effects of human resource management, unionization and industrial actions in the aviation industry (Boyd, 2001; Gittell & Bamber, 2010; Harvey & Turnbull, 2010b; Harvey, 2009).

10 The target groups of existing research consisted of unionized, permanently employed pilots and cabin crews. The issue of contract pilots and self-employment has not been covered so far. This Master Thesis places the focus on performance effects linked to employment relations, which are associated with contract pilots in European airlines. Thereby it closes the gap in current aviation research. As a side effect, it was discovered that using contract pilots also affects operational performance of permanent pilots. It is not uncommon that airlines are making use of both types of pilots at the same time. Utilizing contract pilots on flexible terms at lower costs for the same task, increases pressure on permanent pilot positions and their associated benefits. The purpose of this Master Thesis is to supplement current research in Employment Relations by extending the target group by non-permanent, contract pilots.

2 Problem Definition: Competitive Strategy and the Airline Industry

Starting in the late 1980s the European Commission began to introduce legislation packages aiming at establishing a single market for air transport within the boundaries of the EU member states. These legislation packages included the freedom for airlines to fly routes between any member states at fares solely setup by the airlines themselves and later the right of “cabotage” was introduced, allowing airlines from one member state to operate a route within another member state (European Commission, 2012b). In 2005, the EU defined an external aviation policy, which was designed to include countries outside the European Union in the liberalized EU aviation market. In 2007, the United States joined the so-called “open skies” agreement (European Commission, 2012a). Originally the market for air transportation was highly regulated through bilateral agreements between states (Doganis, 2006, pp. 27–31). Those agreements governed traffic rights, capacities and prices. Together with the liberalization of the European market these restrictions were lifted (Doganis, 2006, pp. 45–50). EU airlines were now able to select their own routes, set their prices and decide how much capacity they introduced into the market, independently of governmental preconditions. These freedoms led to the emergence and rapid expansion of privately owned low-cost carriers and the state-owned legacy carriers were facing new challenges as their state protected monopoly ceased to exist (Doganis, 2006, pp. 159–170). Not only the end of state protected market positions was the reason for rising competitive pressures. The newly established low-cost carriers had the advantage to start up with lean labor cost structures without union influence. Due

11 to their state-owned history legacy carriers faced high levels of unionization. Through years of collective bargaining, their pilots had managed to negotiate attractive salaries and high levels of job security. The business model of the low-cost carriers was based on cost leadership, focussing on minimization of all operating costs. For employees, these cost minimization strategies were connected with less attractive employment conditions for the pilots (Doganis, 2002, pp. 115–120; O’Sullivan & Gunnigle, 2009). As a result, the legacy carriers had to find ways to compete with their new low-cost rivals in order to defend their markets. Due to industry structure, airlines have only limited options available to compete (Porter, 1996, pp. 68–69). In order to define the problem, competitive forces and competitive strategy are discussed at first in Chapter 2.1 and 2.2. Thereafter both areas are applied to the airline industry in Chapter 2.3. Afterwards employment relations and tools to achieve competitive advantage through the workforce are covered in Chapter 2.4 and 2.5. Combining these areas in Chapter 2.6 leads to the definition of the research question in Chapter 2.7.

2.1 Competitive Forces

According to Porter (2008) it is important for companies to be aware of the Five Competitive Forces. Understanding industry structure allows companies to position themselves in less competitive areas of their industry thus leading to higher levels of profit.

Figure 1: Porter´s Five Forces (Porter, 2008, p. 80)

12 2.1.1 Threat of Entry

According to Porter (2008, pp. 80–81), whenever it is easy for new entrants to add capacity into an existing market and gain market share, pressure on prices and costs will increase. In turn, established companies will be forced to evaluate their options in order to compete with new entrants. Naturally the first reaction of incumbents is to evaluate their cost structure for possible savings. If costs stay on the same level, and prices are lowered to compete, profits decline. Therefore, a high threat of entry limits the profit capability for a given industry. Thereby it is not important if the market entry of an intruder happens or not. If the threat level is high enough, incumbents will keep prices low as a precaution to prevent any market entry before it actually happens.

2.1.2 Barriers of Entry

Barriers of entry are out of great interest for incumbents to protect their market from intruders. Porter (2008, pp. 81–82) argues that seven major sources provide disadvantages for new-entrants:

1. Economies of scale on the supply side Since established companies are producing larger volumes at low unit costs, they can spread costs on a larger scale. Thus, intruders are forced to start up at similar dimensions. Hence, the intruder might loose interest in entering the market at such a large scale.

2. Benefits of scale on the demand side (network effect) The value of a product depends on the amount of customers who use it. The major players for aircraft manufacturing are Boeing and Airbus and together they are holding over 90% of total market share (Innovata, 2011). Therefore, it is less likely that airlines will buy from a new manufacturer who is trying to enter the industry. It is already a risky undertaking to be the launch customer for a new aircraft type from an established manufacturer. On these grounds, it is accepted that airline launch customers receive significant discounts as compensation for possible delivery and implementation problems of new aircraft types.

3. Customer switching costs Buyers can face switching costs, when they change suppliers. For example, an airline that is changing is its fleet, needs to train its employees on the new type of aircraft and type specific parts need to be available in store for maintenance requirements.

13 4. Capital requirements The need for large capital investments to enter an industry can discourage companies to enter a new market. Especially if these financial resources are at risk, it will be more difficult to receive financial backing from investors. On the other hand, if an industry yields high profits, investors are willing to fund new startups. Therefore, it might be a surprise that in the airline industry with low levels of profitability, companies can still secure financing to acquire new aircraft. Since the aircrafts have a high resale value, investors do not fear a loss of their investments. So even in the airline industry with low profitability levels, investors play an important role in increased levels of competition as they help new airlines to acquire aircrafts without large upfront investments. Hence, new entrants can swiftly add capacity into existing markets.

5. Advantages for established companies irrespective of size These advantages can be related to quality or cost. A unique geographical location, over time acquired knowledge or a particular company culture, can even lead small firms to compete successfully with larger rivals. For example, Southwest Airlines pursued a high- commitment approach towards its employees already during its early years of existence. Engaging its employees allowed Southwest to compete successfully with its rivals by delivering high levels of customer satisfaction (Miles & Mangold, 2005).

6. Access to distribution channels Intruders need to find ways to sell their products or services. Instead of selling tickets through travel agents, low-cost airlines were the pioneers in using the internet as a distribution channel by encouraging customers to book flights online.

7. Restrictive government policies Government policies play an important role in helping or blocking new market entries, especially in regulated industries. The airline industry is less regulated in the EU today than it was during the time of bilateral agreements when governments used to control levels of competition within their national territory. Today governments have discovered aviation as highly attractive industry for implying further taxes and fees (e.g. departure taxes for passengers or environmental taxes for emissions). Government policies towards unions can also depend on the type of market economy that is present in a specific

14 country. In liberal market economies, these policies are likely to favor employers and therefore making it more attractive for labor intensive companies (Harvey, 2009). Another factor associated with barriers of entry is expected retaliation by incumbents to protect their market. If intruders are aware that established companies will not shy away from a fight for market share, intruders might re-evaluate their decision for market entry. All these factors should lead to a detailed analysis of possible entry barriers before invaders decide to attack a new market.

2.1.3 Power of Suppliers

According to Porter (2008, pp. 82–83), powerful suppliers can charge higher prices due to a number of reasons. Maybe they occupy a monopoly position or customers have no other suppliers to choose from within a particular market or location. At major airports, for example, airlines can only choose between a few, or even only one ground handling company. Hence, the handling company is in a powerful position to charge high premiums for its services. As mentioned earlier, airlines have to deal with a lot of powerful suppliers in their industry. Also, labor can be a powerful supplier, when the skills of a particular employee group are difficult to replicate due to high levels of specialization. Due to legal requirements, pilots are difficult to replace. Therefore, pilot unions are in a powerful position since it is nearly impossible for companies to find replacements during threats of industrial action. This is still the case today for the majority of legacy airlines. On the other hand, trans-national airlines were the first ones to explore options to circumnavigate unions (Lille, 1999). Flag carriers were trying to copy these strategies as far as their legal and institutional framework allowed it (Barry & Nienhueser, 2010; Harvey, 2009). Naturally they were facing strong opposition from labor unions as these strategies are designed to mitigate the unions´ influence (Bamber et al., 2009).

2.1.4 Power of Buyers

Following the reasoning of Porter (2008, pp. 83–84), powerful customers can be responsible for increased pressure on prices in an industry. Especially in industries with high fixed costs and perishable products, it is tempting to sell a product while it is still carrying value. If buyers have a choice between similar products at low switching costs, they are in a powerful position. Airline passengers are a vivid example. Airlines have high

15 fixed costs (aircrafts, personnel, fuel) irrespectively of a passenger occupying a seat or not. Once the flight has departed with an empty seat, the loss cannot be recovered. Consequently, the airline product is highly perishable (Harvey & Turnbull, 2010a). Passengers, on the other hand, can choose between several airlines, especially on high- density routes. Additionally passengers face little switching costs, since they have no need to commit to a particular airline. That was one of the reasons; airlines started frequent flyer programs: Promoting an increase in switching costs for customers by binding them through bonus programs (Carlsson & Löfgren, 2004).

2.1.5 Threat of Substitutes

As Porter (2008, pp. 84–85) describes, substitute products or services serve a similar purpose or address the same need as an existing product. Hence, if the substitute offers a higher value for a lower price and the customer switching costs are low, the risk for substitution is high. The moment an industry is facing a high threat of substitutes, the profitability of the industry suffers. For example, airlines face the threat of substitution by high-speed train connections in their short haul city-pair market (International Labour Organization, 2001).

2.1.6 Rivalry among existing Competitors

Following the arguments of Porter (2008, pp. 85–86), competitors have several ways to compete. Their options can be based on price, new products, quality of products and levels of customer service. If high levels of rivalry are present in an industry, profitability is limited. If competition takes place over longer periods of time, it has a tendency to increase. The level of rivalry also increases when several competitors of equal size participate while the industry´s growth slows down. On the other hand, high industry growth is not going to protect companies from customers with high bargaining power or attractive substitutes. Simply focussing on a growth strategy will not lead to success. Instead, it might introduce other strategic problems like excess capacity and product convergence. Similar products available in high volumes are leading to price competition. Rivalry based on price competition becomes a ruining exercise as it only transfers already small profit margins from companies to customers in form of discounts. Network airlines, for example, use profits from their long-haul network to keep fares low for the short-haul

16 feeder routes. Generating low prices through transfer of profits leads to falling industry profitability and only dominant industry players stay in business. Another negative effect of price competition is that customers get used to specific price levels which do not reflect the real value of the product at all. Low-cost airlines like Ryanair promote very low fares. In turn, customers become reluctant to pay more for a ticket with a network carrier, even though it might offer higher levels of service on a similar route (Lawton, 2003). Additionally if exit barriers are high, companies might stay in the market even though they are producing losses, which increases competition even further. Whenever several rivals compete on the same product features or addressing the same customer needs, the consequence is zero-sum competition. Whatever gain one company achieves, constitutes a loss for another. If a company wants to create real competitive advantage, it needs to make hard choices (Ghemawat & Rivkin, 1998, pp. 18–19). Thereby trade-offs are wanted and unavoidable (Porter, 1996, pp. 68–70). The example of airberlin shows that trying to be everything for customers at once is not a sustainable strategy (AirBerlin, 2013). Initially, airberlin started out as charter company. Later on it added high-frequency flights between city pairs (“city-shuttle”) as a full-service airline and ended up in direct competition with established network airlines and low-cost carriers, while still providing charter services. The negative financial performance of airberlin reflects the success probability for such a strategy.

2.1.7 Industry Structure

According to Porter (2008) Industry structure derives from the intensity of the Five Competitive Forces. For an external observer, industries might differ from the outside perspective, but the primary drivers behind profitability are similar. Levels of competition and profitability in any industry are linked to the underlying competitive forces. Thereby it does not matter if industries are service- or product-based. In the medium and long run, profitability depends on the strength of the Five Forces. Even if companies manage to generate short-term profits, future profitability is not guaranteed if the forces are neglected in the firm´s long-term strategy. It is important for companies to retain a part of their generated value, namely in terms of profit, which could be invested into sustainable strategies like greater levels of product differentiation. Firms should therefore avoid situations where powerful customers or suppliers bargain away any profit margin by demanding lower prices.

17 2.2 Competitive Strategy and creating Competitive Advantage

Significant amounts of research are available concerning competitive strategy and how it can create competitive advantage for companies (Ghemawat & Rivkin, 1998; Hamel & Prahalad, 1993; Porter, 1996, 2008). Again, it was Porter (1996) who addressed the topic in an understandable way by asking one simple question: “What is Strategy”? Before Porter, Hamel and Prahalad (1993) already argued that strategic mindsets are the basis for competitiveness and competition is more than a simple product contest. This section will address competitive strategy by discussing Porter´s reasoning and other valuable contributions to the topic.

2.2.1 What is Competitive Strategy?

In order to create a competitive strategy, one must understand the forces that form the competition in that particular industry. Companies in the same industry are well aware of the existing levels of profitability. It is important though to find the strongest force since it is the driving variable behind profitability levels. Only then a plan can be formulated to address the most-significant factors in a competitive market. Therefore, it is vital for managers to understand the underlying structure of their industry and create a strategy accordingly instead of being distracted by temporary factors (Porter, 2008). Especially in fast-growing industries with similar products or services, it is easy to get lost in cost savings initiatives while simultaneously losing focus on uniqueness (Porter, 1996). Furthermore, it is not unusual in a given industry to base managerial decisions on collective wisdoms. Unfortunately, this leads companies to compete on a common basis. For example in the airline business many companies tried to copy the successful parts of the low-cost business model by increasing seating density and introducing a la card pricing, where customers had to pay extra for services that used to be available for free. Many airlines followed the same approach and product convergence led to price competition. Especially for airlines, price competition is rather destructive as profit margins are slim (Porter, 1996). Through long-term goals with a focus on a unique and valuable product, firms should strive for being irreplaceable in their market of choice (Ghemawat & Rivkin, 1998).

18 2.2.2 Industry Analysis

Nowadays competition in many industries happens on a global playing field. Especially in industries like aviation, local barriers to competition have been removed on several levels in the favor of global ones. Consequently, industry analysis must be extended to the global marketplace. For European airlines, it is not enough to only focus on competitors within Europe, but also to include airlines from other regions of the world (e.g. Middle-East carriers), which are tapping into the same market (International Labour Organization, 2001; Kassim, 1997).

According to Ghemawat and Rivkin (1998) a thorough industry analysis will show opportunities which can be related to buyers, suppliers, competitors, new entrants, possible substitutes and all other relevant factors within the industry. Utilizing attractive characteristics of the industry, and avoiding the less promising ones, is key to strategic planning. To spend more time on examining the competition through industry analysis is more powerful than blindly following financial forecasts and trends, which are based on today´s market environment. Tomorrow they are already outdated. Therefore, Porter (2008) claims that the industry analysis will reveal fundamentals, which are less likely to change quickly. Hence, analyzation of the industry forms the basis for strategic positioning which should maneuver the company into a spot with less exposure to the competitive forces.

2.2.3 Strategic Positioning

Following Porter´s (1996) reasoning, strategic positioning constitutes the next logical step after the industry analysis has revealed the most-dominant competitive forces in the industry. According to Porter (1996), strategic position is aiming at finding a spot in the market where the company faces minimal exposure to those forces. Another option is to build defenses against the forces and maneuver into a position that competitors are unlikely to attack. Once a company has found its place, the complete value chain must be adopted to create value in unique ways for the customers. The planning cycle should be long-term of at least ten years or more. However, only a unique strategic position is not sufficient to ensure a continuous advantage. Success is likely to attract imitators. To impede ambitions of the latter it is important to embed unique value chain activities into an interlinked system, which is harder to copy by incumbents.

19 2.2.4 Activity Systems

Porter (1996) argues that competitive advantage derives from the firm´s full set of activities, which are all integrated with each other. The more unique and valuable activities are compared to competitors, the greater the benefit will be. As mentioned earlier, these activities comprise the complete value chain and concern all departments of the company and their associated processes. Unique, valuable activities on their own are not enough to generate a sustainable advantage. Only when these activities are linked and interact with each other, the firm has created an activity system with the capability of superior profitability. Especially when companies create links over various layers of activities, so- called second- and third-order fit, the greater the chances are to achieve sustainable advantage. Other airlines have tried to copy Southwest and its low-cost model, but Southwest´s value creation is integrated into a tightly linked activity system. In its attempt to copy Southwest, Continental airlines set up a low-cost carrier called “Continental Lite”. It failed eventually, even though it copied all the obvious attributes of Soutwest´s business model such as point to point connections, one single type of aircraft and no free extras (Casadesus- Masanell & Tarziján, 2012). Furthermore, Porter (1996) emphasizes that is important that companies choose to perform their activities in unique ways. Only advertising to be different is not enough as customers will quickly discover if a company does not follow up on its promises. In this case, strategy is simply degraded to marketing slogans which will not be sustainable in the long-term. Establishing strategy in the form of activity systems involves the whole organization. In turn, whenever one activity improves, other activities in the system benefit from it. Unfortunately, the same principle applies to a decrease in activity performance. Therefore, all activities need to be properly maintained and analyzed for improvements on a constant basis. This process allows an organization to develop unique skills and capabilities, which in turn foster corporate identity. On the inside, employees know what the company stands for, and they can align their duties accordingly. Thus, it is critical for managers to clearly communicate the organization´s strategy and to provide employees with background information concerning business performance. Additionally by emphasizing vision- and the mission statements of the company, CEOs provide guidance for employees in their daily routines and help them to base decisions on these principles. For example, if airline management clearly communicates that the company places a

20 focus on connecting passengers, it is easier for pilots to delay their flight to wait for customers from a late connecting flight. On the outside, clear communication assures customers and business partners alike on what they can expect in terms of value and business practices. Once the chosen activities are linked in the system, it is important to decide how to execute them. As mentioned earlier, all activities need to perform well; otherwise the whole system is jeopardized. Since cost advantages are achieved through performing tasks better than competitors, operational efficiency (OE) efforts need to be considered. Before addressing OE, linkages between activities are discussed in more detail.

2.2.5 Strategic Fit

According to Porter (1996), the integration of individual activities into a system is defined as strategic fit. Linking activities together that complement each other create greater amounts of economic value. Implementing linkage over several levels not only leads to competitive advantage but increases sustainability as well. Fit that consists of more than one level is called “second- or third-order fit”, depending on the amount of interconnected tiers. Another positive effect of strategic fit is its increased protection from imitation. Several interlocked activities are naturally harder to copy. Porter claims that imitation is more likely to happen for single activities such as a set of product features, which can be easily acquired from third parties (e.g. adding an inflight entertainment system from an external supplier to airline fleets). The challenging part of linkage is its interconnection. The failure of one link can lead to a domino effect. Therefore, link performance requires constant monitoring. Nevertheless, Porter considers the advantages of multi-fit systems provide superior performance compared to strategic positions relying solely on individual activities. Hence, it is worthwhile to invest into increased monitoring measures for activity systems. Strategic fit can also increase leverage of resources. When resources are shared by several activities, efficiency will increase. Consequently, the quality of resources and their diversified utilization can have a positive influence on activity costs. For example, an airline that utilizes its flight attendants to clean aircrafts during turnarounds, lowers expenses for additional cleaning personnel and reduces turn around time (Boyd, 2001). Resource leveraging will be discussed in more detail in section 2.2.9.

21 2.2.6 Added Value

Activities create expenses for companies. However, Ghemawat and Rivikin (1998) emphasize that generated value creates customers´ willingness to pay. They argue that any activity in the value chain can be the deciding factor for increasing willingness to pay. Especially intangible factors often influence a purchasing decision. For example, support activities (e.g. customer service) can play an important role for customers to buy a product. Southwest Airline´s friendly crew and ground staff have repeatedly led to high levels of passenger satisfaction which ultimately resulted in high levels of customer retention (Miles & Mangold, 2005). Accordingly, any cost cutting initiatives in areas that do not have a direct link to profit generation could affect the ability of a firm to create value for customers. Maybe it requires more substantial investments to break away from the competition, but this particular difference might trigger higher levels of willingness to pay. That is why continuous benchmarking of costs against competitors might mask opportunities that require higher investments on the activity side. Based on the Southwest example, imagine the reduction of customer service training and its direct impact on customer retention. The loss might outpace the saving of training expenses. Consequently, operational effectiveness needs to be balanced in association with the overall strategy of the firm (Ghemawat & Rivkin, 1998; Porter, 1996).

2.2.7 Operational Effectiveness

Porter (1996) argues that operational effectiveness is not strategy. Nevertheless both are required to achieve sustainable advantages over competitors. Operational effectiveness is about conducting activities more superior than competitors by executing tasks faster, with fewer resources, with qualitatively higher materials, to a higher standard or at lower costs. Still, there is a difference in delivering products with greater value compared to selling similar products only produced at lower cost. Greater efficiency lowers unit costs. Delivering better quality results in higher revenue per unit. As Porter (1996) noted, it is a common misunderstanding to confuse operational effectiveness for strategy. Nevertheless it is an important part of it. The problem begins when management considers operational effectiveness as the only available tool to compete. Especially opportunity costs are often neglected in cost analysis. Instead, only actual costs are examined since data is readily available. Following the reasoning of Ghemawat (1998) the danger lies in flamboyant saving measures that lead to increased opportunity costs which diminish targeted savings:

22 Cost-intensive processes within activity systems appear highly-attractive as cost saving targets even though hidden opportunity costs could be higher. If an airline outsources its maintenance activities to third party providers, it might save significant expenses on personnel, hangars and storage. On the other hand if ground time of aircrafts increases afterwards due to issues with maintenance quality, the associated costs might exceed the targeted gains in efficiency. Furthermore third party service suppliers who specialize in one distinct area (e.g. aircraft maintenance) tend to provide their services for several companies in the same industry (Rutner & Brown, 1999). Hence, it is not uncommon for firms to outsource industry specific activities to the same third party supplier. As a result, the activity system loses uniqueness and associated value creation (Porter, 1996). The result of decreasing uniqueness is competitive convergence. Companies and their products become so similar that it is getting more difficult for consumers to distinguish between them. Competitive convergence leads to price wars since it is the only remaining detectable difference for the customer. As mentioned earlier, the airline industry is one of the best examples for price competition, since services are very similar between different companies. In the quest for operational efficiency, some companies are more successful than others. Possible strategies for success include leveraging of resources, usage of the latest technology or employing high-performance management systems to motivate employees (J. Pfeffer, 2005; Porter, 1996).

2.2.8 Trade-Offs

A trade-off means that if a company chooses to foster one activity, it cannot pursue another. It follows the same reasoning as company positioning: By occupying one peak, it is not possible to occupy another at the same time (Ghemawat & Rivkin, 1998).

The reasoning for trade-offs has three different backgrounds. The first one is linked to corporate image. If a company is publicly known regarding its unique way to provide a service, any attempt in another direction might result in lacking credibility as it could confuse customers what to expect in the future. Consider Ryanair, which has created an image that the only thing that matters is the ticket price. Company policies regarding baggage weights and carry-on luggage are rigorously enforced by its personnel in order to offer low-fares.

23 Thus, the company chooses to forgo higher levels of customer service, which constitutes a trade-off. In the recent past though, Ryanair has started a campaign to improve its image. Due to its previous history, it is not easy for Ryanair to convince customers regarding its new caring approach (Financial Times, 2014). The second type of trade-off relates to the activity system itself. Activities are tailored to strategic positions. These tailored activities require distinct resources and process configurations to perform them well. If an airline chooses to provide long-haul services, it needs particular aircraft types for this purpose. These aircrafts are less efficient on short- haul routes, which constitutes a trade-off. Incompatibilities between equipment, processes or employees are regularly revealed by trade-offs (Porter, 1996).

Finally, by choosing a strategy to compete, managers need to align the organization for this purpose. Trade-offs have to be made due to internal coordination and control efforts. It is not possible to do everything at the same time. By deciding what not to do brings the focus back to invest in unique activities, which are harder to copy. If competitors struggle to imitate a company´s activities, the risk for competing solely on terms of operational effectiveness decreases. Healthy competition is driven by value and not by price. If one´s strategic plan is missing trade-offs, there is a need to re-evaluate. Unfortunately, managers had the tendency in the past to eliminate trade-offs in line with increased efforts to improve operational efficiency. Porter (1996) stresses the fact that without trade-offs companies will have a hard time to achieve sustainable competitive advantage in the long run.

2.2.9 Stretch and Leverage

Hamel and Prahalad (1993) argue that competition is not only about companies, products and services. It also depends on strategic mind-sets of leaders. Some managers accept their resource base as a given and adapt their strategies accordingly. There is nothing wrong with this tactic, but it might block the view of what the firm could potentially achieve. If the goal is chosen as the starting point, the strategy can find ways to get there with the resources available. By having a clear target in mind and being limited by one´s resources at the same time, companies can discover less resource-intensive processes to achieve their goals. By leveraging available resources in several ways, "to get a bigger bang for [the] buck" constitutes a possible solution (G. Hamel & Prahalad, 1993, p. 78).

24 Companies have in essence five available options to increase the “bang” factor. Namely by aligning resources with strategic targets, efficient accumulation of resources, complementing different types of resources to increase their productivity, conserving resources as much as possible and quickly recovering resources when the market- environment is favorable (Hamel & Prahalad, 1993).

The second approach is downsizing. A reduced workforce has to produce the same product or service. With other words “becoming lean and mean - in essence, reducing the buck paid for the bang” (Hamel & Prahalad, 1993, p. 78). Outsourcing can also be seen as a form of downsizing since the company ultimately reduces its number of employees. The significant difference between downsizing and leveraging is that the latter is engaging people. When companies utilize employees in different functions across several departments, people feel empowered in their new positions. Job satisfaction is linked to employee performance. Thus, gains in productivity are possible by providing the environment that fosters job satisfaction. On the other hand, downsizing has less positive effects on the workforce and associated employment relations. Especially if employees have been made redundant, only to find themselves being re-hired on reduced pay and conditions via external providers, morale will be affected significantly (Boyd, 2001).

To have the right mindset about competition, and how to get ahead of rivals, companies and their managers need to challenge their frames of reference. These mental structures consist of common assumptions or accepted wisdom prevailing in the industry, but also the company´s understanding of itself and its abilities to drive competitive advantage. Managerial frames are primarily related to company leaders and their understanding of competitive strategies, their current and previous industry experience and their business school education. If common wisdom in the industry is strong, it is easy to follow the example of others, especially when consulting firms are actively selling the same strategy to several companies within the same market (Hamel & Prahalad, 1993). “In this sense, managerial frames, perhaps more than anything else, bound a company's approach to competitive warfare and thus determine competitive outcomes” (Hamel & Prahalad, 1993, p. 76).

25 2.3 Competitive Strategy in the Airline Industry

In oder to understand how airlines can achieve competitive advantage, the driving factors of competitive strategy in the airline industry need to be analyzed at first.

2.3.1 Competitive Forces in the Airline Industry

All Five Competitive Forces are active in the airline industry and therefore almost no company can generate attractive returns on investment for its shareholders (Porter, 2008). During a video interview with Porter for the Harvard Business Review in (2008), Porter portrays the airline industry to be among the least profitable industries ever. Applying the Five Forces reveal the reasons behind limited profitability levels. Rivalry in the airline industry is staggering intense, and it is almost entirely based on price. Due the a commonly standardized value proposition (e.g. similar airplanes, identical service levels, equivalent end product of transporting passengers from A to B), it is difficult for companies to differentiate themselves and their products. Additionally barriers of entry are low, since airplanes acquisition is manageable for start-ups, which results in a constant stream of new entrants irrespective of weak profitability within the industry. Furthermore airlines are constantly dealing with powerful suppliers, as there are no substitutes available either due to geographic location (e.g. at a specific airport) or due to the airlines´ requirements for specialized products or services (e.g. ground handling agents). Labor is also a powerful supplier for airlines. Especially in legacy airlines, pilot unions have considerable power to affect the operation. Thus, Porter concludes that the airline industry is an excellent example to proof that the real profitability drivers are embedded in underlying industry structures (Harvard Business Review, 2008). Differences in profitability between industries have proven to be fairly constant over longer periods of time. However, industry structure itself can also be subject to change due to external factors that result in effects on profitability (Porter, 2008). Market deregulation efforts by the EU constituted such an external impact on industry structure, as it provided low-cost airlines with the opportunity to identify and claim new-strategic positions (Porter, 2008). Furthermore, the airline industry is highly cyclical and extremely sensitive to economic cycles (Doganis, 2002, pp. 15–20), leading to short periods of mediocre profitability followed by long periods of low profitability or losses (Harvard Business Review, 2008). In order to build a competitive strategy with the ultimate goal of creating a sustainable advantage, the Five Forces and all associated factors need to be considered. Therefore, underlying drivers of competition in the airline industry are addressed, before discussing different airline strategies. As noted already, the

26 airline business is very vulnerable to high levels of competition as the industry structure contains important variables that promote rivalry between competitors:

1. High threat of new entrants Low barriers of entry enable new start-up carriers to add capacity into the marketplace (Harvard Business Review, 2008). Airplanes can be leased with little up front investments and since technology in the industry is generic, other required services such as maintenance, catering, cleaning, airport handling, sales and marketing can be outsourced through third party suppliers. There are very few things that haven´t been subject to outsourcing so far (Berss, 1996). Rutner and Brown (1999) already hinted towards the concept of the “virtual airline”. The future airline would only own the brand, employ a few managers directly and outsource all other functions to external suppliers.

2. High bargaining power of buyers Passengers have many airlines to choose from at low switching costs (Harvard Business Review, 2008). Since offered services are rather similar, the decisive factor for passengers tends to be the ticket price. Customers take high levels of safety for granted, since international regulations apply to all companies in the same way. Nevertheless airline performance in terms of product reliability can differ and influence customers choice for particular airlines. Nowadays, online platforms allow customers to compare airlines and their performance directly.

3. High bargaining power of suppliers The International Air Transport Association (IATA) (2006) argues that the majority of airline suppliers have monopolistic characteristics. Fuel price depends extensively on oil price. However, airlines can protect themselves with fuel hedging practices to a certain extent. Nevertheless, fuel hedging involves additional costs as well. Ground handling companies also hold strong bargaining positions since only a few companies are available at a given airport. Airports themselves set the landing fees. Especially busy hub airports charge expensive landing fees. Moreover, governments continuously introduce new taxes for air travel. Due to the high level of price competition in the industry, airlines cannot transfer these extra costs onto their passengers. Instead, profit margins for airlines decrease continuously.

27 4. High rivalry It is not possible to recover all induced costs from the supplier side through increasing ticket prices. Passengers can readily switch between airlines and are highly price sensitive. The airline product itself is highly perishable. Worsening the situation is the fact that due to high levels of fixed costs, the margin to break even is rather small. Even a slight decrease in load factor can lead to an operational loss. Therefore, airlines tend to use pricing mechanisms to fill as many seats as possible prior to departure since “demand for air travel is highly elastic: reduce the price and sales rise sharply” (Lawton, 2003, p. 177). Last minute offers were the direct result of these practices. Today these offers only remain with specific airline business models, such as charter flights. Network carriers and low fare airlines (LFA) have reversed this logic, based on the theory that a passenger who needs to fly last minute is willing to pay more. Therefore, the cheapest fares for network and low- cost airlines are mostly available long in advance.

5. Threat of substitutes The threat for substitutes depends on the airline business model. For long-haul flights, there are no substitutes available to travel the same distance in the same time frame. On short-haul city pairs though, high-speed train connections have become a possible substitute (International Labour Organization, 2001).The advantage of trains is linked to increased security restrictions at airports as these measures increase total travel time for airline passengers.

Dunleavy (2010), the Vice President for Strategy and Planning at WestJet, provides an excellent summary about continuous competitive pressures for airlines. Dunleavy argues that many major airlines have increased their efficiency levels significantly in terms of labor cost reduction, increased fleet utilization and reduced fuel consumption. After so many efficiency programs, not much space is left for additional operational cost savings.

28 Dunleavy (2010) continues to elaborate on his vision of how a new airline model could provide relief in the future: Suppliers should take over responsibility and share the burden of airlines. Suppliers cannot expect to earn profits while their airline customers suffer constant losses. Airlines require flexible pricing on behalf of their suppliers, especially during economic downturns. The same applies to passengers who got used to fares, which do not even cover the costs of travel. Finally, airlines should base success on profitability and not on market share.

The next section focusses on strategic positioning for airlines. It enables airlines to reduce applicable competitive forces and increase levels of profitability.

2.3.2 Strategic Positioning of Airlines: Business Models & Trade-Offs

Considering the competitive environment, airlines have several factors to consider in order to position themselves appropriately in the market. Choosing the right business model is an important step. In simple terms a business model defines how firms, corporations or industries generate value within the market (Graf, 2005).

The business model itself consists of a set of activities and processes in the value chain (“activity system”) that generate revenues by selling products or services in a chosen market.

Hence, airlines have to decide which business model they pursue in order to create value in their market. Existing airlines can only change their business models at considerable efforts and costs. Hence, start-ups have the advantage to choose a model which promises the best fit for their target market.

Bieger and Agosti (2005) identify four main business models in passenger air transport: • Network Carrier / Full Fare Airline • Charter Carrier • Regional Carrier • Low Cost Carrier

29 All these business models are connected to a distinct sets of activities to fit particular strategic positions. To choose the wrong model for one´s anticipated niche or market can lead to serious consequences. For example during the late 1990s, more than 100 new airlines entered the market in Europe, but more than 70 went out of business or merged with one of their competitors (Lawton, 2003).

For the purpose of evaluating employment relations at a later stage, the focus is placed on two business models: Network Carriers and Low Cost Airlines.

Network Carriers aka Full-Fare Airlines: Based on Cook and Goodwin (2008), traditional legacy carriers have established themselves as network carriers. Their operation is based on a hub-and-spoke route structure. In the original idea of the hub-and-spoke concept, all passengers are flown from their origin airport to the hub. Thereafter they are transferred to connecting flights if the hub is not their final destination. Since network carriers can operate long- and short-haul services, they require various types of aircrafts. Furthermore, they offer a full range of services, which can include different travel classes, on-board meals, checked baggage and airport lounges. Business customers are of particular interest for network carriers, since profit margins for business fares are significantly higher, than those for economy passengers. Economy fares are usually scattered around the break-even mark. Some network carriers also carry cargo in the holds of passenger aircrafts. Operating a highly complex hub-and-spoke structure leads to higher operational costs for network carriers. Due to their history as state carriers, the majority of network carriers are highly unionized and many years of collective bargaining manifests itself in higher levels of labor costs (Blyton et al., 2001).

Low-Cost Carriers: Low-cost carriers emerged in the late 1990s within Europe. In the United States, Southwest Airlines was founded already in 1967 as the first low-cost airline (Rhoades, 2006). Due to the success of Southwest´s business model, European low-fare airlines attempted to copy the underlying structures. The first airline in Europe to follow Southwest ´s low-cost model was Ryanair (O’Sullivan & Gunnigle, 2009). One of the key points of the low-cost business model was its point-to-point route structure. The point-to-point system is designed for direct flights without stop-overs. Passenger board the airplane at their origin

30 and disembark again at their destination. In contrast to network carriers, low-cost carriers tend to serve all their markets with only one type of aircraft and keep offered services at a minimum. In this “no frills” approach, ticket prices only cover basic services. If passengers require additional services (e.g. checked luggage), extra fees apply. Low-fare airlines focus primarily on reducing operating costs. Hence, they can offer the cheapest fares to generate demand. Since European low-cost airlines had the opportunity to start-up from scratch, the could do so with a lean cost structure. Initially, unionization levels were low with terms and conditions for employees below those of network carriers (Bamber et al., 2009; Gittell & Bamber, 2010; Graf, 2005). The low-cost model has proven to be very successful, especially in economic downturns. During times of uncertainty and traffic declines, low-cost airlines have acted aggressively in strategic terms by reducing prices, renegotiating contracts with suppliers and by acquiring other airlines to gain market share. Network carriers have been slower and less pro-active in these turbulent times (Lawton, 2003).

Trade-offs: Adopting a strategic position requires different activities, resources and capabilities. It is important to make a choice in order to avoid being caught in between positions. Trade-offs between incompatible positions are necessary (Porter, 1996). Low-cost airlines have successfully shown their ability to pursue alternatives to either gain market share or even create entirely new markets (Lawton, 2003). By making hard choices companies improve fit in their activity system. However, strategic positions are not sustainable unless there are trade-offs that occur as a result of incompatible activities. When an airline chooses to serve meals, turn around time will increase. On the other hand, by choosing to omit meals, service levels are reduced for the benefit of faster turn around times (Porter, 1996). According to Lawton (2003) the low-cost model is based on the cost-service trade-off, which is centered around the principle of cost reduction. All associated activities must fit this philosophy. Only by being able to offer the lowest fares, a sustainable advantage is generated. Being attracted and challenged by the success of the low-cost airlines, network carriers tried to copy elements of the low-cost business model. Many attempts by legacy airlines to establish a no-frills subsidiary have failed. Running both business models simultaneously only resulted in unhappy passengers, demotivated employees and decreased quality levels (Graf, 2005).

31 On the contrary, EasyJet has managed to attract business customers by flying out of primary airports. EasyJet willingly accepted a cost increase for gaining market share with business passengers (Lawton, 2003). On the other hand, this strategy risks a potential decrease in strategic fit of the low-cost model (Porter, 1996). After reviewing the basic differences of the two business models, the typical activity systems of both business models are compared in the next section.

2.3.3 Activity Systems and Strategic Fit: How airlines differentiate themselves

Different business models result in different activity systems. The following table provides an overview to compare the efforts of network carriers and low-cost airlines to differentiate themselves.

Low-Cost Airline Full-Fare Airline / Network Carrier Point-to-Point route structure Hub-and-Spoke route system Mainly short- to medium-haul routes Short- and Long Haul Utilizing Secondary Airports Primary Airports High aircraft utilization – quick turn arounds Lower utilization, especially on short-haul. Longer turnarounds due to connecting passengers Simple brand Sophisticated brand Focus on low fares Complex pricing Single service class configuration of Multiple class configuration (e.g. First, airplanes Business, Economy, Economy Extra) Additional services available for purchase Services provided according to travel-class (meals, checked luggage, seat (business lounge access, fast lane security, reservations) meals) No alliances with other carriers Alliances with other carriers for interlining Common aircraft fleet Mixed fleet Focus on online ticket sales Sales via travel agents and online bookings Extensive Outsourcing Limited Outsourcing High-density seating Multiple class configuration limits high- density seating to Economy Class only Table 1: Low-Cost versus Full-Fare Airline Activity Systems (Lawton, 2003; Williams, 2001)

32 Table 1 reveals how network carriers and low-cost airlines differentiate themselves. The major differences arise from the cost-service trade-off. For low-cost airlines, all activities have to follow the main philosophy of the business model: cost efficiency. Network carriers and their activities have to deal with more variables due to their multiple service offer. The more variables influence the activities within the system, the more difficult it becomes to create fit between all of them.

Other airlines have tried to copy Southwest and its low-cost model. However, Southwest´s value creation is integrated into a tightly linked activity system. Therefore, it is harder to unriddle for competitors (Porter, 1996). Figure 2 shows the interlock between activities at Southwest.

Figure 2: Southwest Airlines´ Activity System (Porter, 1996, p. 73)

33 The past has shown that a change of business model must be planned carefully to identify all required activity changes at first. Early implementation efforts of wrongly identified activities need to be avoided. The essential task for management in introducing a new business model is its ability to apply the new model simultaneously (e.g. Continental and Continental Lite) or independently (e.g. Qantas and Jetstar) to its existing model (Taneja, 2010).

2.3.4 Airline Cost Competition

The cost structure of the airline industry is over-proportional based on fixed costs. The major fixed cost items are labor, aircraft ownership, infrastructure and maintenance. Variable costs include fuel, airport handling, landing fees, air traffic fees, catering expenses and cleaning (International Air Transport Association (IATA), 2006). As discussed earlier, labor costs are easier to adjust than fuel costs. Figure 3 reveals how the share of labor costs for major airlines worldwide decreased from 28.3% in 2001 down to 20.1% in 2008. At the same time, the share of fuel costs has increased from 13.6% in 2001 to 32.3% in 2008. Airlines have little options to influence fuel price as it directly linked to oil price. Fuel hedging can limit large fuel price fluctuations, but this extra level of protection carries additional costs. Fuel efficiency can be increased by using fuel efficient aircrafts, optimizing routes with modern flight planning software and by introducing operational fuel saving procedures. The latter depends significantly on the goodwill of pilots to perform them as it is their decision how much extra fuel they carry on each flight or if they are willing to engage with air traffic control to negotiate shorter routings.

Figure 3: Airline Operating Costs, by Region of Airline Registration (International Air Transport Association (IATA), 2010, p. 1, table 1)

34 As rivalry in the airline industry is intense and products are very similar, price competition is a frequent occurrence. In order to compete on price and still achieve a profit, airlines must be extremely cost efficient. Therefore, companies are constantly trying to increase efficiency levels, especially in the areas of labor and fuel burn (Lawton, 2003). To measures airline expenses, the term “cost per available seat kilometer (CASK)” is used. Especially cost structures of low cost airlines are clearly different from those of network airlines. This is logical, since the entire low-cost business model is based on cost optimization. When comparing the cost levels between low-cost carriers and network airlines in Figure 4, Ryanair´s and EasyJet´s average unit costs are respectively 64% and 40% lower than the average network carrier´s CASK (International Air Transport Association (IATA), 2006).

Figure 4: Adjusted cost per available seat kilometer (CASK) for European Airlines 1997-2004 (International Air Transport Association (IATA), 2006, p. 6, fig. 1.2)

The major cost differences between full-fare airlines and low-cost carriers result from three different areas. First, low-fare airlines do not require large investments compared to multi- class service offerings of network airlines. For the latter, achieving operational cost reduction is crucial while avoiding impacts on service standards. Otherwise, network carriers could risk their advantage in terms of product differentiation over low-cost airlines. Multiple class offerings constitute one of the only remaining differentiating measures

35 between full-service airlines and their low-cost competitors. Second, low-cost carriers were very successful at improving pilot productivity through increasing working hours up to legal flight time limits. At the same time pay schemes were introduced that linked larger parts of pilot salaries to actual flying hours. This approach transformed fixed costs into variable costs. Additionally outsourcing of non-essential core activities (e.g. catering, passenger handling, maintenance) reduced operational costs even further. One of the advantages of outsourcing is that it reduces the fixed costs relative to the company´s variable costs, which in turn reduces the break-even level (Rutner & Brown, 1999). Especially non- unionized carriers like Ryanair could easily implement outsourcing strategies due to missing collective agreements and non-existing representation for employees (O’Sullivan & Gunnigle, 2009). Other carriers used "flag of convenience" strategies to circumnavigate unions and reduce labor costs (Lille, 1999). Point-to-point routes and uniform aircraft fleets generate further operational savings. Third, lean organizational structures keep overhead costs at lower levels. Additionally, distribution channels are centered on internet sales in order to avoid travel agents and their sales commissions.

Cost structures and underlying drivers of competition in the industry leave airlines with limited options to compete. Either they differentiate themselves in terms of service or they pursue a low-cost strategy. Nevertheless there is no standardized, low-cost business model either. Instead, the low-cost approach incorporates a wide range of activities. Some airlines follow the pure low-cost approach by only operating point-to-point routes and offering ultra-low prices (e.g. Ryanair). These rock-bottom fares generate levels of demand, that create a new market space within the low-cost segment (Lawton, 2003). Other carriers keep the basic low-cost characteristics but adopt activities from network carriers. For example, EasyJet is flying from major airports to attract business customers. In either case, options are limited since airline products are very standardized for both full- service and low-cost carriers. Thus, irrespectively of their business models, all European air carriers are subject to rigorous cost pressures (Bieger & Agosti, 2005). Network carriers differentiate through service, but the profit margins are small due to higher fixed cost related to service activities. Additionally, competition from low-cost airlines on short-haul routes and financially-backed state carriers from the Middle-East (e.g. Emirates, Etihad, Qatar Airlines) in long-haul markets create intense pressures on the bottom line. Furthermore, European low-cost carriers compete for market share with network carriers at primary airports and with other low-cost carriers on secondary point-to-point routes. In

36 all cases, European carriers have no other choice than focussing on cost drivers within their immediate control. Thus, it does not come as a surprise that pilots and their unions have been subject to both outsourcing measures and increased attempts to lower their terms and conditions (Blyton et al., 2001; International Labour Organization, 2001).

2.3.5 Outsourcing Strategies in the Airline Industry

In their ambitions to increase profitability levels, airlines have used outsourcing as cost control method to reduce fixed costs, to improve efficiencies and to lower the breakeven point. Outsourcing can be performed either through third-party suppliers or by transferring non-core activities to subsidiaries. In theory, outsourcing should enable companies to focus on their core business activities (Rutner & Brown, 1999). Especially low-cost airlines tend to outsource nearly all their operational activities (Lawton, 2003). Nevertheless, in the race for operational efficiency, care must be taken not to outsource unique activities that are required to create competitive advantage (Rutner & Brown, 1999). Start-up airlines are even more likely to outsource activities, which established airlines perform internally. This approach is sensible, since new entrants lack experience in operational areas compared to incumbents. At the same time, new entrants incur a cost advantage. Outsourcing transfers parts of their fixed costs (e.g. for maintenance) to the variable costs section. Even if established airlines aim to outsource some of their activities to third party suppliers, the airline´s ownership structure and its level of unionization present critical factors for success or failure of outsourcing efforts. Unions regularly oppose outsourcing strategies as they contradict the unions´ ideology of job security. In coordinated market economies like Germany or Scandinavia, where high employee ownership levels of companies are paired with restrictive labor laws, it is unlikely that outsourcing attempts succeed (Barry & Nienhueser, 2010). On the other hand, in liberal market economies (e.g. UK, Ireland) management faces fewer obstacles in their outsourcing ambitions due to less restrictive labour laws (Harvey, 2009; Rutner & Brown, 1999). Therefore, the barrier for airlines in liberal market economies is lower to outsource pilots to third party suppliers. Consequently, cross-border employment is not uncommon. For example, airline X with its headquarters in EU country A, establishes a base in EU country B and employs pilots via a flight-crew leasing agency applying labor laws of country C. This is a typical example of “crews of convenience” (Lille, 1999). Nevertheless, since 2012 applicable social security law is regulated by EU regulation EC 465/2012, which requires crews to be covered by

37 social security regulations of the EU country, where they are based (European Union, 2012). The pilot union of airline X is facing a dilemma in any case. By using crews of convenience managers of airline X effectively bypass the pilot union. The union of airline X is limited by collective bargaining regulations of country A and has little influence on the company´s business in country C, especially if operations are run via a local subsidiary (Blyton et al., 2001). Boyd (2001) points out that these practices by European carriers are questionable in highly competitive markets, especially where service quality is still a crucial differentiation factor. To subcontract crews via third party suppliers, together with reduced training efforts, clearly points into the direction that costs take precedence over quality. The International Transport Workers' Federation (ITF) (2002) also raises concerns that increased outsourcing efforts affect aviation safety, since crew competence and training should have priority over cost saving measures. Only fifteen years ago, Rutner and Brown (1999) argued that it was highly unlikely for airlines to outsource their pilots. Today it has become standard practice for many airlines to outsource both pilots and cabin crew either via subsidiaries or through external crew leasing agencies (Boyd, 2001; Harvey & Turnbull, 2009). Again, the level of outsourcing depends on the type of market economy and prevailing unionization levels within companies. Interestingly Rutner and Brown (1999) further claimed that due to the complex nature of some activities, it can be cheaper to retain these functions in-house. Rutner and Brown hold that the “pilot is considered an integral part of the company and a core component to its success” (Rutner & Brown, 1999, p. 26). Apparently airline managers did not concur with this statement, as outsourcing of pilots has increased over the last decade (Blyton et al., 2001; Harvey & Turnbull, 2002; International Labour Organization, 2001). Furthermore, Rutner and Brown already described in (1999) the concept of the “virtual airline”, in which all functions are subject to outsourcing. The only remaining assets of the airline itself are the brand and a few managing employees. Rutner and Brown´s forecast in (1999) predicted intensive outsourcing over the next 20 years with significant implications for all parties involved. Today, only 15 years later, their forecast has already become a reality. The effects of outsourcing for employment relations have been significant, and the impact on pilots cannot be underestimated (Bamber et al., 2009). In turn, what are the repercussions for competitive advantage? Is Rutner and Brown´s original reasoning to keep airline´s core competencies for success (e.g. pilots) in-house still valid today? Behind this background, the next section will discuss employments relations in European airlines in more detail.

38 2.3.6 Employment Relations and Airlines: Are employees more than cost factors?

What are employment relations? McConnell (2001) divided the term into employee relations and labour relations. Employee relations cover human resource practices and procedures that govern employment conditions of employees. According to Appelbaum (2003) employee relations in airlines tend to prioritize communications of rules and regulations over sharing the organizations´ performance, mission- and vision statements. Labour relations, on the other hand, describe the relationship of the company with any bargaining-unit (McConnell, 2001). The latter could be either a union or an employee- organized labor group. For the purpose of this Master Thesis, the author extends the term of employment relations to include employee relations between airlines and externally hired contract pilots.

The airline industry once enjoyed relative protection from competition and could offer high levels of remuneration and job security to its employees. Today, airlines and other service industries are subject to substantial low-cost competition. As a result, managers focus on strategies to improve cost efficiency (Appelbaum & Fewster, 2003). As both Hamel with Prahalad (1993) points out, labour costs can also be reduced by increasing productivity levels of employees. However, downsizing or outsourcing have adverse affects on employment relations, which could weaken the organizational cultures of companies. In the worst case, attempts to minimize labor costs could could result in destroying the company´s organizational culture as whole (J. Pfeffer & Veiga, 1999). Unfortunately the approach of airlines to managing their most-important asset, people, has changed. Especially management imposed cost saving measures, without preceding consultations, have raised concerns at labor (Gittell & Bamber, 2010). Management has been increasingly creative to bypass unions and traditional channels for collective bargaining (Blyton et al., 2001). Particularly trans-national-corporations (TNCs) in the airline business have adopted “flag of convenience” policies from the shipping industry (Lille, 1999). These measures enabled TNCs to source labour on an international basis. Additionally, by employing “crews of convenience” through subsidiaries, airlines can reduce the influence of their unionized workforce at the parent company. Airlines have been quick to create holding companies as it allowed them to transfer capital and resources between subsidiaries. The parent holding company does not operate aircrafts or employ crews directly. Instead, it rents airplanes with crews (“wet lease”) from

39 its subsidiaries. Hence, management can use the threat of transferring jobs to cheaper subsidiaries as lever to enforce pilots to cooperate (Blyton et al., 2001; Cappelli, 1985). Being faced with these new challenges, unions have come to realize that they need to organize themselves on a global level to address the growing disparity between the mobility of capital on one side and labor on the other. Otherwise, trans-national airlines will continue to use crews of convenience to reduce terms and conditions for European airline pilots (Blyton et al., 2001). The latest and most-prominent example in Europe is Norwegian. The parent company, Norwegian Air Shuttle established a holding company and cancelled its own airline operator certificate. Cappelli already claimed in 1985 that "carriers have been quick to establish holding companies as a means of generating financial pressures for concessions” (Cappelli, 1985, p. 328). After the holding company had been established, Norwegian began to wet-lease flying services from its newly established subsidiaries for short-haul “Norwegian Air Norway (NAN)” and “Norwegian Air International (NAI)” for long-haul operations. The long-haul subsidiary, Norwegian Air International, employs its pilots via crew leasing agencies on Singaporean contracts. The pilots are based in Bangkok even though they operate Irish registered aircrafts (Boeing B787 Dreamliner) from Scandinavia and the UK to the United States. The European pilot union of Norwegian Air Shuttle has been effectively circumnavigated through Norwegian´s “flag of convenience” strategy (European Cockpit Association, 2014). The case of Norwegian further highlights that airlines have adopted a top-down management approach, where changes are simply imposed on the workforce and their unions. Academic evidence suggests that these practices are inappropriate for highly knowledge- based service industries (Appelbaum & Fewster, 2003). In line with their top-down management style, airlines appear to employ a command-and-control approach towards their workers. Particularly Ryanair has a reputation for its tough approach towards employees. Unfortunately, several other low-cost and network airlines have followed suit. Airlines are virtually compelled to adopt characteristics of the low-cost model if they want to stay competitive as low unit costs are imperative for profitability (Bamber et al., 2009; O’Sullivan & Gunnigle, 2009). According to O´Sullivan and Gunnigle (2010) employment relation strategies of airlines are closely linked to their respective business models. Gittell and Bamber (2010) argue that especially two models are predominant in the airline industry. The first model is referred to as “high-road” employment relations with emphasis on commitment and partnership between unions and management. Southwest Airlines is considered to be the role model

40 for this approach. "Low-road" employment relations, in contrast, are characterized by union avoidance, suppression and control. Not surprisingly, Ryanair is considered to be the role model for the “low-road” strategy (Gittell & Bamber, 2010). Primarily companies in liberal-market economies have adopted low-road employment relations by implementing cost-efficiency measures that are predominantly based on wage minimization and increased labor productivity. At the first sign of a market downturn, these companies begin to introduce short-term cuts on labor costs, which are applied unilaterally by management. The labor laws of liberal-market economies provide employers with greater freedoms in this context compared to the regulatory environment of coordinated-market economies (Turnbull, Blyton, & Harvey, 2004). Low-road employment relations utilize "hard" human resource management (HRM) practices. High-stress levels and long working hours for employees lead to increased conflict levels between management and the workforce (Boyd, 2001). Staff turnover increases, since people prefer employers that utilize the high-road model. Employees of low-cost subsidiaries can directly compare their working conditions with those of their colleagues at the “high-road” parent company as a reference point. These comparisons can lead to even lower levels of job satisfaction for workers at the subsidiary. If employees at both the parent company and its subsidiary are unionized, increased conflict levels between unions and management are likely (Harvey & Turnbull, 2010b). Airline managers accept these broken relationships as collateral damage on their campaign to reduce labor costs by circumnavigating unions (Cappelli, 1985). Ryanair´s CEO Michael O´Leary is known for being a hardliner concerning any collective bargaining negotiations, as he utterly refuses to engage with labor unions (Barry & Nienhueser, 2010). To avoid unionization, Ryanair is making significant use of outsourcing through crew leasing agencies. Thus, the company gains greater control over the pilots as contractual agreements with agency workers can quickly be terminated. Ryanair makes widespread use of this practice as it focusses on enforcing compliance opposed to fostering employee commitment for shared goals. With other words, "management by fear" has replaced traditional HRM methods (Gittell & Bamber, 2010; O’Sullivan & Gunnigle, 2009). These characteristics of low-road employment relations are contrary to the high- commitment approach, which Southwest emphasizes by its philosophy of achieving mutual gains for both employees and the company. As a result, it is not surprising to witness low levels of job satisfaction at “low-road carriers”. Closely linked to job satisfaction, employee morale is in free-fall. Airline managers should be concerned by these developments as

41 profitability and customer satisfaction is directly related to both job satisfaction and employee motivation (J. Pfeffer & Veiga, 1999; J. Pfeffer, 2005).

Union avoidance is directly related to low-road employment relations (Gittell & Bamber, 2010). If companies follow the avoidance strategy, employees are actively discouraged from unionization or other forms of collective representation. Besides, companies are not interested in employee participation concerning business-related decision-making. The extreme form of union avoidance is called “union-busting", where companies hire external consultants to prevent employees from establishing a union or any other collective bargaining unit (Logan, 2006). High levels of indirect labour, in form of agency workers, are beneficial for union-busting, since employment contracts of these workers can be easily terminated (O’Sullivan & Gunnigle, 2009). Consequently, the workforce is discouraged from any attempts of unionization. Union accommodation is the lighter version of union avoidance. In this version, companies negotiate with unions but only on the basis of the minimum legal requirements (Gittell & Bamber, 2010). Union avoidance and accommodation are common practice nowadays in the airline industry (International Labour Office, 2013). Ryanair has gone one step further and integrated it into its business model to achieve even lower unit costs (O’Sullivan & Gunnigle, 2009).

However, the success of the low-cost business model is not dependent on low-road employment relations. A few low-fare airlines embrace the high-road model. Southwest Airlines is the most-prominent example, followed by JetBlue on a similar approach to employment relations (Emerald Group Publishing Ltd., 2007; Gittell & O’Reilly, 2001). In Europe, Cassani was assigned the task to create a low-cost subsidiary for British Airways in 1998. The new company was created with the emphasis being placed on high-road employment relations. Cassani desired to prevent poor morale to affect the organization (Cassani & Kemp, 2003). As noted earlier, the low-road approach can be found especially in liberal market economies (Harvey, 2009). Coordinated-market economies like Germany and Scandinavia feature an institutional framework that requires the companies to consult with its unions and employees over any restructuring measures (Barry & Nienhueser, 2010). Thus, it encourages partnership between companies and employees. Furthermore, activity systems of companies in these markets are designed to interlock employment relations, training and compensation levels.

42 Scandinavian states also encourage partnership between unions and companies. This philosophy assumes that only profitable firms are in a position to provide decent working conditions. Labor costs in Scandinavia are high, but companies compensate it through means of innovation and productivity. Employees can directly influence business decisions as the workers are represented in advisory boards of their companies (Bamber et al., 2009). The partnership approach between unions and management boards is characterized by levels of interaction beyond the minimum specified in collective bargaining frameworks. Both parties make an effort to support each other on the basis of mutual respect and commit themselves to shared goals. Key characteristics include frequent exchange of business related information, high levels of communications, joint problem-solving and sharing of knowledge (Gittell & Bamber, 2010). The example of Southwest Airlines proves that it is possible to achieve long-term profitability through commitment to the partnership philosophy. It emphasizes the point that even within liberal-market economies managers have the freedom to choose which model of employment relations they would like to pursue. Airlines can promote partnership by providing job security for their employees. In exchange, unions offer flexibility in working conditions to meet market requirements. Genuine teamwork requires commitment from all parties involved (Bamber et al., 2009). Union accommodation is a downgraded version of partnership. In this context companies and unions only negotiate when its required and not beyond the framework of collective bargaining (Gittell & Bamber, 2010). Companies need to be aware that their approach towards unions and employees have implications on the job performance of their workers. Especially union avoidance results in lower job satisfaction, less commitment and finally lower performance of the workforce. Ultimately these factors will impact the bottom line and ability to create competitive advantage. On the other hand, by engaging their employees companies can unleash higher levels of performance (J. Pfeffer, 2005).

43 2.4 Competitive Advantage through People: An Opportunity for the Airline Industry?

As Pfeffer (2005) points out, research clearly draws a connection between employment relations and profitability levels of companies. Firms who treat people as assets, instead of cost factors, enjoy greater financial success than corporations that devote their complete attention to the exploitation of labour. Unfortunately, airlines seem to have missed out on the beneficial correlation between positive employment relations and business performance. Instead, airline managers continue their strategy of labor cost cutting. Accordingly, they circumnavigate unions and unilaterally enforce restructuring measures upon the workforce (J. Pfeffer, 2005). To the detriment of aviation labor, airline managers display greater signs of refusal towards academic research, than their colleagues in other industries (Eaton, 2001). The typical pattern for airlines in declining market conditions includes activities to protect profit margins by limiting costs. Carriers typically reduce training efforts, freeze pay levels, delay promotions and initiate redundancy programs. Consequently, these actions affect variables that are prerequisites to achieving competitive advantage through people: job satisfaction, motivation, commitment and loyalty (J. Pfeffer & Veiga, 1999). Particularly if managers communicate that employees are easily replaceable, the downward trend of these variables continues. Perceived job security decreases significantly together with mutual trust. Job security is fundamental for partnerships between employers and employees. Furthermore, whenever employees are leaving, the company loses expertise as well. In the short-term, labor cost cutting, union avoidance and management by fear can result in temporary gains. Nevertheless, increasing levels of unhappiness at work create a climate that can foster poor service levels and increased staff turnover on top of high absence rates. Sales, profits and costs are adversely affected. In the long run, achieving success by empowering people, instead of replacing them, leads to sustainable advantages. The example of Southwest Airlines together with findings from academic research validate this philosophy (J. Pfeffer & Veiga, 1999; Smith, 2004). In order to establish employees as a core competence, companies can utilize high- performance work systems. These systems have been able to increase business performance of up to 40% (Jeffrey Pfeffer, 1998). The implementation supports high- commitment management practices and high relational coordination3.

3 Relational coordination is characterized by mutual respect, high levels of communication, joint problem- solving, common goals and shared knowledge (Gittell & Bamber, 2010).

44 Workers are invited to participate in joint decision-making as they are considered a valuable resource, rather than a cost factor (Gittell & Bamber, 2010). Valuable resources enable companies to perform activities better and more efficiently than competitors. To fully extract the value of their resources firms should tie them in activity systems. Resources are considered valuable when they are difficult to imitate and depreciate slowly. Additionally, companies need to have direct control over them. Further characteristics of valuable resources include difficult substitution and high levels of quality (D. J. Collis & Montgomery, 2008). Collis and Montgomery thereby strengthen the argument of Rutner and Brown (1999) that companies (airlines) should not outsource valuable resources (pilots), which are directly linked to the companies´ core competencies.

2.4.1 Airline Pilots: A valuable resource?

Collis and Montgomery (2008) provide guidance on how to create strategically valuable resources. Pfeffer and Veiga (1999) argue that people are the most valuable resource for companies. By applying these theories to the airline industry, the author claims that by employing pilots permanently, airlines have greater opportunities to convert them into valuable resources:

Permanent pilots generate greater returns on training investments: Pilots legally require training for the aircraft that they are going to fly. This type-specific training entails large investments in terms of capital, time and resources. Therefore airlines have an interest in the pilot to stay long-term in the company after completion of the training. Contractual training bonds are one solution, but limited in duration. Once the bond runs out, the pilot is free to leave. Offering permanent employment with long-term job security and high-road employment relations are another option to encourage pilots to stay. The latter option is based on trust and commitment, compared to a legal bond. Thereby pilots are able to plan a long-term career with the airline. Additionally, compared to other assets, pilots do not depreciate in value over time compared to other tangible assets, such as aircrafts.

Companies can exercise greater influence over permanent employees: Since contract pilots are employees of crew-leasing agencies, all HR related matters are outside of the airline´s area of responsibility. If contract agencies do not provide the right

45 "level of service" to their employees, job satisfaction is affected. Unfortunately, the airline is facing the consequences in terms of reduced employee performance. In case of permanent pilots, the HR department of the airline is in the right position to support their pilots in all HR related matters and prevent negative effects on job satisfaction.

Experienced pilots are difficult to substitute: An airline has several options to source its pilots: Directly from flight school with little flying experience, from the open job market or by providing ab-initio training themselves. Experienced pilots who are already qualified on aircraft types like Boeing or Airbus are constantly in demand somewhere in the world as various regions have different levels of pilot demands. On the other hand, supply of flight school graduates is higher. Nevertheless, airlines require a balanced mix of experience levels in their cockpits, as senior pilots train their less experienced colleagues. It can take from three to ten and more years for junior pilots to upgrade to Captain. Consequently, it is difficult for airlines to substitute experienced, type-rated Captains. Additionally, levels of flight safety are directly linked to experience levels of pilots (Li et al., 2003).

Permanent pilots as superior resource: Next to being selective in the hiring process, providing company-orientated training is key (J. Pfeffer, 2005). When companies provide insights into the firm´s long-term mission, its values and business related strategies, pilots can align their daily operational decisions with long-term company goals. An airline that hires a type-rated pilot via a crew-leasing agency might get a proficient operator, but not necessarily a company-minded business partner.

Companies that make use of high-performance management systems in line with other top-class human resource management practices create the foundation for high levels of job satisfaction. The receipt for success is simple: Satisfied pilots work harder, contribute more, offer greater levels of productivity, have fewer days of absence and increase customer satisfaction (Appelbaum & Fewster, 2003). A study of 100 German companies found strong connections between high-commitment management practices and stock market performance of companies (J. Pfeffer & Veiga, 1999). Thus, strategies that center around people can produce substantial long-term results for shareholders.

46 2.5 High-Performance Work Systems: Tools to achieve competitive advantage.

High-performance work systems are based on several foundations. The survey for this study utilizes these variables as benchmarks to evaluate employment relations from the perspective of airline pilots.

2.5.1 Employment Security

Employment Security is fundamental for the implementation of high-performance work systems. Even though it is difficult to offer employees 100% secure jobs, workers appreciate employment assurances from their companies. In return, employees provide companies with their valuable contributions for joint problem-solving in terms of knowledge or by enhancing productivity through their skills and additional efforts (J. Pfeffer & Veiga, 1999). Furthermore, employment security has positive affects for training efforts. The company is less reluctant to provide additional training since employees are more like to stay. Thus, the company´s return on its training investments rises. Employees, on the other hand, can enhance their careers by obtaining new skills (J. Pfeffer, 2005). Even in challenging times, companies must learn not to start layoff processes too early. Otherwise rising opportunity cost occur, as companies have invested time and money in selecting and training their workers. Additionally competitors are likely to use the opportunity to hire these highly trained and skilled workers at low acquisition costs (J. Pfeffer & Veiga, 1999). Southwest clearly communicates its intentions to provide job security for its workers. Lay- offs are devastating for company culture, but keeping staff during difficult times creates trust and loyalty (Gittell & Bamber, 2010). According to Herb Kelleher, the CEO of Southwest Airlines, providing job security also affects the hiring process. First of all, hiring is performed less frequently. If demand is rising, staff productivity levels are increasing as the work-force is kept smaller to limit fixed costs (Freiberg & Freiberg, 1996).

2.5.2 Sharing of Information

Information sharing is another essential component for high-performance work systems. Sharing of in-depth business related information like financial status, strategic goals and operational activities to achieve them, enables the workforce to identify itself with these targets. Thus, each employee is enabled to align daily work routines towards these common goals. It has been argued that information is too sensitive to be shared with the workforce as it could leak to the competition. Most likely the competitors are aware of it

47 regardless. Thus, it is more beneficial to keep employees in the loop. Even trained, skilled and motivated workers require information to act upon (J. Pfeffer, 2005). In order to align the whole organization with its long-term goals, it is vital to emphasize the company´s vision and mission plan to achieve it (Appelbaum & Fewster, 2003).

2.5.3 Job Satisfaction and Employee Motivation

Job satisfaction leads to greater motivation, which in turn leads to the desire to get involved in collective decision-making to bring the company forward. Engaging workers in decision-making, encourages employees to anticipate greater levels of responsibility. This constitutes a fundamental difference to classical “top-down” management methods. High- commitment management practices cover all these factors. Empowered people work harder and act more responsible because they feel trusted with greater levels of responsibility. As Pfeffer (1999) points out, all these practices are founded in social science, and sufficient evidence has proven their effectiveness. Again, it is Southwest Airlines, which generates most of its cost advantages from these principles as its workforce is highly motivated, productive and committed to the company´s success. Southwest Airlines is highly unionized and underlines the fact that high-involvement management practices work well in connection with a partnership approach towards unions. Southwest´s unionization, its no-layoff policy and its practices for sharing profits with the workforce has increased its labor cost basis compared to other low-cost carriers. Due to increased productivity levels, Southwest´s total operating costs are still lower compared to other low-fare airlines (Emerald Group Publishing Ltd., 2007; Gittell, 2003; J. Pfeffer, 2005).

2.5.4 Work-Life Balance

In order for employees to work hard, they also deserve the opportunity to enjoy their free time. For pilots, work-life balance highly depends on the ability to request specific "off days" to reduce the impact of shift work on their private lives. Airlines that honor roster stability, provide the pilots with better possibilities to align their private lives with their jobs. Lower absence rates are helpful indicators for positive levels of work-life balance. If airlines are willing to help pilots to request specific days off, pilots are more likely to be flexible and volunteer to work on rostered off days when needed. Thus, airlines benefit from increased pilot productivity due to greater levels job satisfaction among its aircrews (Harvey & Turnbull, 2010b; Stork, 2014).

48 2.5.5 Sustainability

Companies that make the effort to invest in high-performance management systems are more likely to achieve sustainable advantage over competitors. Other sources of success (financial structures, new technologies, operational efficiency measures) are easier to acquire and faster to implement. In turn, they are easier to imitate for competitors. On the other hand, activity systems which are based on interrelated activities are harder to untangle from the outside. Companies that aim at achieving competitive advantage through their workforce must be aware that the implementation of required structures takes time and a long-term perspective. More importantly, managers need to lead by example to build trust. Sharing of operational and financial information also takes time to penetrate all levels of the organization. Some companies even provide training courses for their employees, who are not familiar with business related financial information. Pure sharing of data does not help if it is not fully understood by the recipient. To re-assure people of job security, considerable communication efforts are required as well. Once all measures fall into place, competitive advantage through people has the ability to achieve sustainable levels of profitability (J. Pfeffer & Veiga, 1999). For Southwest Airlines this strategy has resulted in 41 consecutive years of profitability (Southwest Airlines, 2014). Surprisingly, only Southwest Airlines seems to apply high-performance work systems consistently together with its partnership approach towards unions (Gittell & Bamber, 2010). Appelbaum (2003) even urges aviation managers to link customer value with employee performance. Otherwise, endless price wars and cost-cutting are likely to continue as dominating force in the industry. Boyd (2001) demands from airlines to follow their rhetoric that people are their most-important asset and finally engaging in active cooperation in the form of high-road employment relations. Harvey and Turnbull (2010b) emphasize that airline managers possess considerable strategic choice in dealing with unions, employees and ultimately employment relations in general. Tanja (2010) claims that the mentality of airline management is frequently the underlying reason for low performing employees. Companies must provide the right working environment for workers to deliver their best performance. Only if companies invest into their people by allowing them to advance their skills, they can utilize them for the company´s benefit. After having provided the necessary background information concerning competitive strategy, human resource management and employment relations, these areas are funneled together in form of the research question.

49 2.6 Structuring of the Problem: Effects of Outsourcing on Employment Relations

The Five Competitive Forces allow the detailed analyzation of the underlying drivers for competition in any given industry. By revealing connections to industry profitability levels, managers can then position their companies accordingly to find the “sweet spot” with the least exposure to competition in order to maximize company profitability (Porter, 2008).

The Five Competitive Forces are particularly strong in the airline industry. Barriers of entry are low, as investors provide startups with financial options to acquire aircrafts. Especially aircraft leasing does not require large, up-front investments (Harvard Business Review, 2008). Also buyers, represented by passengers, possess high bargaining powers due to low switching costs. Furthermore, customers frequently have the choice between several airlines for a given route. Suppliers occupy powerful bargaining positions as well. Especially at the airport level, ground handling companies and airport operators have monopolistic powers, resulting in little bargaining power for air carriers. National air traffic control providers, despite being privatized companies today, still inhabit monopolistic positions originating from their time as governmental institutions. The largest variable cost item for airlines, fuel, is directly linked to the oil price with little options to influence it 4 (International Air Transport Association (IATA), 2006; Pilarski, 2007). Next to the fact that airlines have limited influence on their variable costs on the supplier side, air carriers also face high levels of fixed expenses. Especially labor costs represent the largest cost factor in this area. As managers have little control over other cost positions, labor receives substantial attention in terms of efficiency programs (Harvey & Turnbull, 2010b). Moreover, intense competition leaves airlines with limited room to maneuver. Essentially, airlines have two options: Service differentiation or the low-cost model. Both of these strategies originate from cost-service trade-offs. If a company chooses to pursue service differentiation, which is normally the case for full-fare / network airlines, the cost level increases. The low-cost strategy offers no-frills service for lower fares. Overall, the final product for both strategic options is the same: Transporting a passenger from A to B. The products consist of similar resources (check-in, catering, baggage-, passenger handling) and generic technologies (similar aircrafts and cabin design), which are not unique and therefore easy to copy. A lot of these resources have been outsourced by airlines to third party suppliers already, leading to even greater reductions in product innovation. Therefore, profit margins of both strategies significantly depend on the ability to provide

4 Airlines have to pay premiums for fuel hedging options (Cobbs & Wolf, 2004).

50 the respective service level as cost efficient as possible. Again, the focus remains on labor as primary cost reduction target, since management has stronger control over staff costs compared to airport charges, aircraft ownership fees or fuel prices (Harvey & Turnbull, 2010b; Rutner & Brown, 1999).

The severity of labor cost reductions depends on unionization levels and types of market economies where the airlines are based. High unionization levels, and the legal environment of coordinated market economies require greater efforts for labor cost cutting. On the other hand, labor laws of liberal market economies offer greater flexibility for managers to reduce labor expenditures. Workers outside of collective bargaining units have very little options to protect their terms and conditions (Barry & Nienhueser, 2010; Harvey, 2009). However, even in companies with high levels of unionization in coordinated market economies, managers have found ways to circumnavigate unions. Airline managers adopt “flag of convenience” strategies to gain greater freedoms in dealing with unions and enforcement of deteriorated employment conditions. "Flags of convenience" allows management to outsource pilots to third party suppliers or subsidiaries on lower terms and employment conditions (Barry & Nienhueser, 2010; European Cockpit Association, 2014; Lille, 1999). As noted earlier, “contract pilots” supplied by crew leasing agencies work on reduced benefits in terms of salary and pension. These pilots are subject to lower levels of job security and they have to deal with social security issues themselves5 (O’Sullivan & Gunnigle, 2009). Pilots who have to work under these conditions tend to show lower levels of job satisfaction and motivation. Why should they feel committed to their airline, when they are not even directly employed by it? Even if pilots at subsidiaries are permanently employed6, the same reasoning concerning job satisfaction, motivation and commitment can be applied. To go one step further, also unionized pilots with permanent employment contracts are likely to show signs of demotivation if their airlines are trying to circumnavigate collective bargaining units by hiring external contract pilots to facilitate company expansion plans on lower cost levels.

5 The European Union introduced regulation EC 465/2012 (European Union, 2012) that requires trans- border airline workers to pay social security contribution in the country, where they are based. Nevertheless this does not imply that the employer will pay their share in social security contributions. From the author´s own experience it is common that contract pilots have to pay both the employers´ and the employees´ social security share. Therefore contract pilots are facing double the amount of social security deductions on their income compared to permanently employed pilots. 6 Being permanently employed at the subsidiary is still subject to lower conditions compared to the mother company.

51 In other studies the term of employment relations is solely applied on the relationship between unions and management (Appelbaum & Fewster, 2003; Bamber et al., 2009; Boyd, 2001; Harvey, 2009). This study extends the term to include the individual pilot- management relationship, irrespectively if pilots are union members, permanent employees or contractors. The study argues that next to high-trust and cooperation between unions and airlines, the same applies to individual relationships between pilots and companies. Furthermore there is likely to be a meaningful correlation between the employment status of pilots (permanent versus contract) and the quality of their relationship with the airlines. This relationship in turn affects variables like job satisfaction, motivation and commitment. Research findings indicate that high values in these variables lead to higher productivity, efficiency, service quality and profits for companies (Bamber et al., 2009; J. Pfeffer & Veiga, 1999; Smith, 2004). Pilots inhabit a position to influence operational efficiency significantly, both positively and negatively. However, do efforts by pilots for operational efficiency differ depending on a) their employment status and b) on how they feel treated individually by their airline? It is necessary to analyze the individual relationship of pilots with their airlines as contract pilots are usually not part of the pilot union due to their non-permanent employment status. Thus, for contract pilots the individual pilot-airline relationship is another factor for job satisfaction on top of any prevailing union-management relation. Consequently, if contract pilots operate less efficiently as permanent pilots, airlines could be better off to follow Rutner and Brown´s (1999) suggestion that pilots should not be outsourced as they form part of the core competencies that are vital for an airline´s success. Academic research is pointing in this direction as airlines have achieved impressive performance results through applying the cooperative approach in employment relations (Harvey, 2009). Cassani focussed in particular on pilots at “GO” 7 as they were considered important contributors for the successful implementation of the low-cost business strategy. Several authors have hinted at the critical role of flight crews for airline performance (Blyton et al., 2001; Freiberg & Freiberg, 1996; Gittell & Bamber, 2010; Harvey & Turnbull, 2010b; Miles & Mangold, 2005). Cassani emphasized that GO´s specific employment relations strategy was the driving force behind its competitive success (Cassani & Kemp, 2003; Harvey, 2009). By applying a high-commitment management style at “GO", Cassani was able to combine the low-cost business model with high-road employment relations (Harvey & Turnbull, 2010b).

7 Cassani was CEO of GO, the 1998 established low-cost subsidiary of British Airlines (Cassani & Kemp, 2003).

52 Nevertheless, the willingness of pilots to contribute can be eroded by trying to bypass established bargaining units or by unilaterally introducing structural changes without consultation (Harvey & Turnbull, 2010a; International Labour Office, 2013; Kochan, von Nordenflycht, McKersie, & Hoffer Gittell, 2003). Consequently, it could prove beneficial for airlines to consider reversing their outsourcing efforts and employ pilots permanently again. Hence, should the focus better be placed on high-commitment, high-performance management strategies compared to low-road, union avoidance practices? Both in the US and the UK sufficient evidence revealed that high- road employment practices are connected with greater levels of work satisfaction for employees (Gittell, 2003; Harvey & Turnbull, 2010b). Furthermore, corporative approaches towards trade unions are considered best practice in terms of human resource management (Harvey, 2009; Kochan et al., 2003).

2.7 Research Question

As it has been noted earlier, current research concerning employment relations in the airline industry is primarily based on permanently employed, unionized pilots. Since airlines increasingly outsource permanent pilot positions, namely by utilizing contract pilots, the research question addresses and closes this gap in existing literature. Thus, after the analyzation of outsourcing in the airline industry, together with its impact on employment relations, the following research question is derived:

Which effect does outsourcing have on employment relations in European Airlines and how does it effect operational efficiency efforts of pilots, thus leading to an impact on competitive advantage?

The research question is divided into the following sub-questions:

(a) How does pilot outsourcing effect employment relations?

(b) How do employment relations effect individual groups of pilots based on their employment status?

(c) How is operational efficiency affected by employment relations?

53 2.7.1 Relevance of the Research Question to the Airline Industry

Earlier research has shown that employment relations have an impact on company performance (Bamber et al., 2009; Harvey, 2009; J. Pfeffer, 2005). Therefore it should be interesting for airlines to discover if their outsourcing efforts of pilots carry any additional opportunity costs due to their effect on employment relations. Especially the contractual employment status of pilots is analyzed. In other words, are outsourced pilots affected by employment relations on the same level as their permanent colleagues? Is this reflected by different levels of pilot efforts when it comes down to operational efficiency? Is a contract pilot willing to go the extra mile in terms of scheduling flexibility or fuel saving compared to his permanent counterparts? Furthermore, other variables affecting employment relations are analyzed. These include prevailing working environments, applied union strategies (partnership or avoidance) and human-resource-management style (high-road versus low-road). Additionally, variables linked to high-performance work systems are investigated: Namely mutual trust and respect, levels of communication and sharing of common goals. Only when managers become aware of how these critical factors improve pilot performance, these drivers can be implemented in long-term strategies of airlines to pursue competitive advantage through people.

2.7.2 Supporting Hypotheses

By outsourcing core-competencies (pilots) to external suppliers, airlines face degrading employment relations with permanent pilots, their unions and with contract pilots as well. Unsatisfactory employment relations come together with the risk of additional opportunity costs as pilots are less likely to engage in operational saving efforts, especially in terms of fuel and on-time-performance.

Based on the research sub-questions (a), (b) and (c), the hypotheses are derived accordingly. The letter in front of each hypothesis indicates to which research sub-question it is related to.

54 (a) How does pilot outsourcing effect employment relations? (a1) Outsourcing strategies have a negative affect on employment relations at union- management- and pilot-management level. (a2) In companies that utilize outsourcing, pilot-management relationships are unsatisfactory. (a3) Airlines that pursue outsourcing tend to control and avoid unions.

(b) How do employment relations effect individual groups of pilots based on their employment status?

(b1) Employment relations affect job satisfaction of pilots. (b2) Contract pilots are more affected by employment relations than permanent pilots in terms of job satisfaction. (b3) Contract pilots limit their commitment at work due to their non-permanent employment status.

(c) How is operational efficiency affected by employment relations?

(c1) Job satisfaction affects pilots in their operational saving efforts, therefore leading to an increase in opportunity costs for airlines. (c2) Outsourced pilots (= contract pilots) are less likely to pursue operational saving efforts due to their employment status and associated employment conditions. (c3) Low-road employment relations lead to reduced saving efforts. (c4) Primarily affected operational areas are inflight fuel management and on-time- performance.

Available research concerning employment relations in the airline industry has already hinted in the direction that companies are able to improve their profits by applying a partnership approach with unions and additionally implementing high-performance work systems (J. Pfeffer & Veiga, 1999; J. Pfeffer, 2005). What has not been covered yet is the issue of outsourcing pilots, especially in connection with the use of contract pilots who work side-by-side with their permanent colleagues. So far, no airline relies only on contract pilots alone. The required data to test the hypotheses and to provide an answer for the research question is collected through the survey, which is subject of the next chapter.

55 3 Research Methods

The selection of the most-suitable research method is based on the question of “how are you going to answer [the] research questions” (Myers, 2009, p. 23). In order to support the decision for a specific method, Royer and Zarlowski (2001) offer some practical guidelines concerning the decision process: First of all, the researcher has to evaluate if the method is appropriate to answer the research question(s). Will the method generate the desired type of result and what are the conditions, the limitations and the weaknesses of the method in question? Are other methods available that could be used to answer the research questions or to test the hypotheses? After consideration of these guidelines, the quantitative research method has been selected to address the research question together with the related hypotheses for the Master Thesis. The decision has been based on the fact that quantitative research is considered the most-suitable method if large sample sizes are intended. Consequently, researchers can apply their findings to a larger population. According to Collis and Hussey (2009, pp. 115–116), the unit of analysis can include a group, organization or industry. In this research, the unit of analysis consists of a specific group within an industry: Airline pilots within European airlines. Following the reasoning of quantitative research, the intention was to apply the research findings from European airline pilots to airline pilots worldwide. The next step consisted of the selection of the respective quantitative research tool.

3.1 Quantitative Research Tool: Survey

The survey has been chosen as appropriate tool to address the research questions through the quantitative method. The survey offers several advantages, namely the ability to handle large sample sizes of quantitative data, swift options for distribution, high levels of anonymity and data security plus integrated tools for data analysis. Since the author intended to answer the research question in terms of analyzing numerical data, the survey offered many options to generate such data. Compared to interviews, surveys allow the collection of large sample sizes with relatively little effort. Once a survey is designed and placed online for data collection, the access link can be distributed to many individuals and organizations (e.g. unions) within the target group. Data collection is automated, which requires no further external input during the process. Interviews, on the other hand, require more time and preparation for each session.

56 It is also more difficult to find suitable interview partners who are willing to contribute to highly controversial topics. Initially, the author considered interviews to substitute the survey results. In order to find suitable interview partners, participants of the survey could indicate if they were interested to participate in a personal interview. Nevertheless, during a personal interview it is not possible for the interviewee to hide his identity from to the researcher and vice versa. The survey offered the highest level of identity protection for all parties involved and thereby allowed the participants to express their opinion about certain topics openly without the fear of repercussions from their employers or managers. Available survey platforms on the internet already include tools for data analyzation next to survey design and data collection. The disadvantages of quantitative research are grounded in the fact that the context of data collection receives little attention (Myers, 2009). During an interview the researcher is able to collect indirect data such as signs of stress while the interviewee is answering questions. Nevertheless, the advantages of the survey in terms of anonymity and swift data collection outweigh its disadvantages in the context of this study.

3.2 Survey Design

The following sections describe how the survey was designed to address the research question and its hypotheses.

3.2.1 Survey Question Design

After the decision was made to answer the research question based on quantitative data, the survey as collection tool had to be designed. The online platform SurveyMonkey was chosen as it offers comprehensive tools for survey design, data collection and data analysis (SurveyMonkey, n.d.-a). For the wording of the questions, particular attention was paid to provide them free of bias. SurveyMonkey offers preset questions covering a large range of different research areas. These questions are either provided by specialized organizations with high levels of expertise in this area or by SurveyMonkey itself. For questions concerning employee engagement (Q12, Q19, Q21), the database of the (Society of Human Resource Management Foundation, n.d.) was used.

57 The database of SurveyMonkey was utilized for questions Q14, Q23, Q24 to assess employment relations through certified, bias-free questions (SurveyMonkey, n.d.-b). The downside of many questions from the bias-free database was their complicated wording as it created comprehension problems with test users of the survey. Therefore, these questions were edited to enhance levels of comprehension. These manual changes resulted in the loss of question certification. Therefore, only six questions remained certified in the final design of the survey, which consisted of 39 questions in total. Nevertheless enhanced comprehension was considered more important, than question certification. The test users of the survey consisted of two English native speakers with professional aviation background8. Once they independently gave their consent, the survey was activated for data collection.

3.2.2 Survey Question Structure

The survey consisted of 39 questions, and they were structured in the following manner: Questions 1 – 10 (Q1 – 10) were designed to collect statistical data. Within the statistical section, Q1 – Q6 collected standardized values like gender, age and rank (e.g. Captain, First Officer). The second part (Q7 – Q10) aimed at more specific data concerning current and preferred employment status (e.g. permanent, contract), type of employing airline and union membership status. Pilots could also voluntarily supply the name of their airline. The second part of the statistical data was designed to facilitate filtering of data during the analyzation process. Therefore, it was possible to compare answers of permanent- with contract pilots to build a link between employment status, employment relations and their direct effect on job satisfaction.

Q12 – Q14 were targeting the working environment together with the workplace culture as these factors are closely connected with employment relations and employee performance.

8 Both survey test users are active airline pilots for a European low-cost airline. One pilot was permanently employed, the other one as a contract pilot. To protect their identities, they do not appear in the bibliography. The author has their contact details and can provide them upon request and after gaining the test users´ prior approval.

58 Q15 – Q20 were designed to establish which approach airline managers took towards pilot unions or unionization efforts and which factors pilots individually considered important for employment relations.

Q21 – Q26 addressed communication levels between management and employees and further analyzed the ambitions of company leaders to integrate their employees (pilots) in making company decisions.

Q27 – Q29 collected data concerning satisfaction of pilots with their remuneration packages and additional benefits.

Q30 – Q31 analyzed work-life balance for pilots at their companies.

Q32 – Q35 were considered key questions to analyze how job satisfaction triggered pilots to help their airlines in saving operational costs. Q34 featured a question logic. Pilots who “agreed” or “strongly agreed” that their level of job satisfaction influenced their intention to reduce operating cost, were diverted to question (Q35). Pilots had to specify in Q35 which operational saving measures they would perform less efficiently due to their reduced job satisfaction. After answering Q35, these pilots were forwarded to Q36. Pilots who had stated in Q34 that job satisfaction does not affect them in their operational efficiency efforts were directly transferred to Q36.

Q36 accessed the effect of contract pilots in connection with their commitment towards additional cost savings.

Q37 analyzed if permanent pilots felt deceived if their airline used contract pilots simultaneously. A question logic re-routed permanent pilots who agreed to this statement to question Q38, where they could select in which areas they were less likely to save costs due to their reduced commitment towards their airline.

Q39 was used as an indicator if job satisfaction has decreased to a level where a pilot is prepared to leave his airline for another carrier.

59 3.2.3 How the survey addresses the research question

The first part of the research question focussed on how pilot outsourcing affects employment relations. The survey provided the answer through several channels. Contract pilots are the direct result of outsourcing efforts by airlines. The survey provided data which allowed comparisons of how contract pilots rated their job satisfaction, motivation, working environment and levels of job security in contrast to permanent pilots. Furthermore, if airlines used contract pilots next to permanent pilots, the latter were asked how they rate the side effects of this management practice towards employment relations. Since all pilots had to indicate their employment status (permanent or contract), the survey supplied the data to answer the second part of the research question concerning how employment relations affect different pilot groups based on their employment status. All pilots were asked to provide details of how their efforts for operational efficiency were effected based on their employment status, their job satisfaction and their commitment towards their airlines. The related data provided the basis to answer the last part of the research question of how operational efficiency is effected by employment status and other factors. Throughout the survey factors for high-performance work systems were utilized as secondary indicators for the level of existing employment relations at European Airlines.

3.2.4 Target Group and Distribution Methods

The target group for the survey consisted of European airline pilots. In order to define “European”, 37 national membership associations from the (European Cockpit Association (ECA), n.d.) were considered. Initially, only ECA was contacted for its support. The idea was that ECA would distribute the access link of the survey together with the required password to all 37 membership associations. Additionally this strategy would have guaranteed participation of professional airline pilots only. After initial interest from ECA, the communication from ECA stopped with no further explanation. Consequently, all 37 national pilot unions were contacted individually and asked for their support by distributing the access link directly within their membership. Since the pilots of Ryanair are not part of a pilot union, but an association outside ECA, the Ryanair Pilot Group was contacted as well. The same applied to the Norwegian Pilot Union and the pilot union of Netjets Europe9, as both unions are established next to the national pilot unions of Norway and Great Britain respectively.

9 Netjets Europe is a business jet operator.

60 3.2.5 Challenges: Data Collection

The initial response rate from unions was very low, and only the pilot unions of Austrian Airlines and Netjets Europe actively encouraged their members to participate in the survey. In order to increase participation levels, personal contacts at Lufthansa placed the survey access link on an internal company forum for Lufthansa pilots. The same method was used to gain responses from pilots at Norwegian and Ryanair, where the survey link was placed in non-public message boards, since the respective union or association did not react to the invitation to participate in the survey. Since all forums of Lufthansa, Norwegian and Ryanair were non-public, the gain of extra data was considered worthwhile to remove the password protection of the survey. Since only a limited number of Ryanair pilots participated in the survey, the risk was deemed low enough to place the survey access link on a public pilot forum10 in Germany to collect further responses.

3.2.6 Anonymity and Data Security

To address the issue of anonymity, survey participants did not have to reveal their identity or the name of their airline. Only the type of airline (e.g. low-cost airline) had to be reported in order to draw conclusions during the data analyzation process. The survey was encrypted using the “https” protocol to increase data security. Additionally, the survey was initially password protected for two reasons. First, by distributing the password together with the access link to European pilot unions, it was possible to rule-out the participation of any non-airline pilot. Second, by protecting the survey by password, airline managers were less likely to get access to it, thereby enhancing identity protection. Especially Ryanair had threatened other institutions with legal action for utilizing survey results which included answers from Ryanair pilots (Travelweekly.co.uk, 2013). After several months with little increase in participation levels, the decision was made to remove the password protection in order to place the link on pilot forums to gain more data. The risk was considered low enough to proceed with this strategy.

10 German Airline Pilots Bulletin Board – www.pilots.de

61 3.2.7 Methods of Data Collection

Initially the survey could be entered only by a dedicated access link together with a password. Later on during the process the password was removed.

3.2.8 Survey Limitations

Placing the survey access link on one public pilot forum was considered an acceptable risk for the benefit of a larger sample size. During data analyzation it was possible to detect some answers of non-airline pilots. In turn, this data was not taken into account. Another limitation of the survey is the sample size of several pilot groups. Even though it was possible to gather 222 complete data sets, the majority of the data consists of permanent pilots, who are working at legacy airlines, namely Austrian Airlines and Lufthansa. Only 45 data sets were provided by contract pilots who were not directly employed by their airlines. As mentioned earlier, the attempt to receive support from the Ryanair pilot group (RPG) and other pilot associations of low.cost airlines to participate in the study did not prove to be successful. It would have been optimal to receive additional answers from contract pilots in order to achieve a greater balance between permanent pilots at legacy carriers and contract pilots at low-cost airlines in terms of data sets.

The share of contract pilots worldwide is rising. Especially in regions like Asia, airlines employ a significant number of expatriate contract pilots through crew leasing agencies to support the airlines´ growth as not enough local pilots are available on the market. Therefore, the findings of this research could be applied to all airlines, where contract and permanent pilots are working side-by-side or where permanent pilots are facing outsourcing attempts by their airline management.

3.3 Survey Results

This chapter presents the data, which was collected through the survey. The survey was able to generate 222 sets of primary data. In the following chapter, the data is presented in several tables and not in figures. Figures are used in Chapter Four to present the findings in relation to the research question. The tables provided in this chapter are the author´s own work. The conclusions associated with the data analysis are drawn in Chapter Five, followed by an overall summary of the research in Chapter Six.

62 The presented data in the following chapters is valid as of 03. August 2014. Due to the amount of collected data, only a summary of the survey data is provided in the Appendix B. The raw data of all responses (Microsoft Excel file) is available upon request.

3.3.1 Survey Characteristics

Software Provider www.surveymonkey.com Collection Method Direct Access Link Statistical Questions 11 Main Questions 28 Time frame of collection 03. November 2013 – 03. August 2014

Collected Responses 269

Complete Responses 222

Partial Responses 47 (Survey was not completed until the end)

Table 2: Survey Characteristics

After reviewing the partial responses, it was decided to exclude them from data analyzation, since the majority of those respondents did not complete the important part of the survey that was related to employment relations. Therefore, this data was excluded from the presentation of the collected data in the following sections. Furthermore, neutral answers labeled “Neutral”, “Neutral/Neither agree nor disagree” or “Neither positive nor negative” in questions Q12, Q13, Q17, Q18, Q19, Q20, Q21, Q25, Q27, Q28, Q29, Q31, Q32, Q33, Q34 and Q37 were filtered out, and the percentages were recalculated to facilitate easier recognition of majorities in the non-neutral answers of the questions.

The respective survey question number is stated next to each data descriptor for easier cross reference to the complete survey data in Appendix B. The summary of the survey data in Appendix B shows all 222 completed data sets without any applied filters. Thus, percentages in Appendix B differ from the presentations in Chapter Three and Chapter Four. The last survey question was removed in Appendix B due to data protection, since respondents provided their email contacts as response data in order to receive a copy of the Master Thesis after completion.

63 3.3.2 Statistical Data

The statistical data was needed to enable data analyzation between different pilot groups in terms of employment status, job satisfaction and operational saving efforts amongst other variables. The general statistical data is summarized in the following tables.

Gender (Q1) Total Answers Percentage Male 215 96.85 % Female 7 3.15 % Age (Q2) 21 - 24 9 4.05 % 25 - 29 38 17.12 % 30 - 39 69 31.08 % 40 - 49 76 34.23 % 50 - 59 28 12.61 % 60 - 65 2 0.90 % Year of professional aviation experience (Q3) less than 5 years 37 16.67 % 06 - 10 years 51 22.97 % 11 - 15 years 43 19.37 % More than 16 years 91 40.99 % Current Position11 (Q4) Captain 123 First Officer 113 TRI/TRE 18 SFI 3 Other 3 Table 3: General Statistical Data: Type of Participants

The data consists of Captains and First Officers with an average experience of more than ten years in the industry.

11 The total amount of selections (266) is greater then the numbers of participants (222), since double selections were possible. For example a Captain can also hold the qualification as TRE, which was counted as 2 selections. Therefore the percentage is omitted as it would add up to over 100%. Additionally Line Check- and Training Captains were combined with ordinary Captains. The same applied to First Officers and Senior First Officers.

64 Airlines types of participating pilots (Q5) Flag Carrier 91 40.99 % Low Cost Airline 59 26.58 % Regional Airline 22 9.91 % Business Jet Operator 33 14.86 % Charter Airline 8 3.60 % Cargo Airline 7 3.15 % Other 2 0.9 % Airlines of participants12 (Q6) Austrian Airlines 34 20.23 % Norwegian Air Shuttle 31 18.45 % Others 22 13.10 % Lufthansa 20 11.90 % NetJets Europe 20 11.90 % Austrian Subsidiaries 14 8.33 % Lufthansa Subsidiaries 12 7.14 % Scandinavian Airlines 8 4.76 % Ryanair 7 4.17 % Voluntary answers provided 168 100 % Table 4: General Statistical Data: Airline Types

Statistical Data concerning Employment Status This part of the statistical data presents the basis to connect employment status with employment relations and operational efficiency. Therefore, the data is displayed independently. Since participants were able to make several selections, the amount of total answers is greater than the number of total survey participants. Thus, adding up all percentages result in more than 100%.

12 Voluntary answer: Only groups of more than five participants are displayed individually. Smaller groups are summarized in “Others”. Percentage values are based on 168 participants who disclosed their airline, rounded to the second decimal.

65 Current Employment Status (Q7) Total Answers Percentage Permanent Employment 171 77.03 % Employment via Crew-leasing Agency 39 17.57 % Self-employed Contractor 6 2.70 % Temporary Contract 13 5.86 % Full-Time 96 43.24 % Part-Time 15 6.76 % PREFERRRED Employment Status (Q8) Permanent Employment 209 94.14 % Employment via Crew-leasing Agency 3 1.35 % Self-employed Contractor 4 1.80 % Temporary Contract 1 0.45 % Full-Time 74 33.33 % Part-Time 47 21.17 % Table 5: Statistical Data: Employment Status

The data shows that there is a preference of contract pilots to transfer from being employed by crew-leasing agencies to permanent employment. Since the majority of the survey participants were employed by flag carriers, it was expected to find lower percentages of contract pilots represented in the data.

Statistical Data concerning Union Membership Pilots were asked if their airlines recognized unions and if the pilot was member of a union.

Union recognition by airlines of participants (Q9) Total Percentage Unions are recognized 188 84.68 % Unions are not recognized 34 15.32 % Union Membership of Pilots (Q10) Pilot is a Union Member 181 81.53 % Pilot is not a Union Member 41 18.47 % Table 6: Union Status

66 3.3.3 Working Environment

To evaluate the working environment of pilots, they had to provide information concerning their workplace and company culture, their working environment and how proud they were of their airlines´ brand. The data is summarized in the following table.

Workplace Culture Satisfaction of pilots (Q12) Total Answers Percentage Satisfied 78 44.57 % Not Satisfied 97 55.43 % Airline´s Working Environment (Q13) Positive 125 59.81 % Negative 84 40.19 % Proud of own Airline´s Brand (Q14) Extremely proud 17 7.66 % Quiet proud 67 30.18 % Moderately proud 49 22.07 % Slightly proud 46 20.72 % Not at all proud 43 19.37 % Table 7: Working Environment

3.3.4 Work - Life Balance

In order to evaluate work-life balance, the survey collected data concerning company support for private matters, the pilots´ ability to balance work with private affairs and the importance of roster stability. To improve clarity of data trends, neutral answers were excluded in the percentage presentation. Nevertheless, the complete data sets in the Appendix B including neutral responses.

Airlines offer support for private matters (Q29) Total Answers Percentage Agree 102 65.38 % Disagree 54 34.62 % Excluded Neutral Answers 66 / Airlines recognize roster stability (Q31) Agree 88 48.89 % Disagree 92 51.11 % Excluded Neutral Answers 42 / Table 8: Work - Life Balance: Company Support and Roster Stability

67 Pilots´ Efforts to balance work with personal life (Q30) Total Answers Percentage Extremely Easy 12 5.41 % Quiet Easy 51 22.97 % Moderately Easy 67 30.18 % Slightly Easy 48 21.62 % Not at all easy 44 19.82 % Table 9: Work - Life Balance: Pilots´ Efforts to balance work with personal life

3.3.5 Pilots´ Terms and Conditions

Additionally remuneration and non-financial benefits have an influence on job satisfaction. Again, neutral answers were excluded for clarity purposes, but can be found in Appendix B.

Satisfied with monetary compensation (salary) (Q27) Total Answers Percentage Agree 97 56.73 % Disagree 74 43.27 % Excluded Neutral Answers 51 / Satisfied with Overall Package (Q28) (incl. non-financial items) Agree 58 33.72 % Disagree 114 66.28 % Excluded Neutral Answers 50 / Table 10: Pilots´ Terms and Conditions

3.3.6 Union – Management Relations

In order to establish the prevailing union-management relationships in European airlines, the union-management relationship classifications of (Bamber et al., 2009) were applied. The data revealed a tendency away from the partnership approach towards control and avoidance, followed by union accommodation and substitution.

68 Union - Management Relations (Q15) Total Answers Percentage Commitment and Partnership 24 10.81 % Accommodating 81 36.49 % Control and Avoidance 93 41.89 % Substitution 24 10.81 % Table 11: Union - Management Relations

3.3.7 Employment Relation from the Pilot Perspective

In order to establish what terms pilots personally associate with employment relations, the survey offered different options to choose from plus the opportunity to provide free text answers. The collected data is very valuable as it provides the pilots´ personal definition of employment relations.

Pilots´ definition of employment relations (Q16) Total Answers Percentage Communication between management and 151 69.91 % employees Mutual trust and appreciation 118 54.63 % Sharing of common goals between management 106 49.07 % and employees Open door policy 101 46.76 % High-Trust workplace culture 94 43.52 % Valuation of one´s individual work 69 31.94 % Collective Bargaining 58 26.85 % Union-Management relations 55 25.46 % Collaboration in decision making between 38 17.59 % employees and management Controlling employees 34 15.74 % (“Management by fear”) Union suppression / union busting 26 12.04 % Other (free text) 7 3.24 % Table 12: Employment Relations defined by pilots

Some of the free text answers addressed the current state of employment relations in the airline industry in outspoken ways. An Irish low-cost airline Captain alleged his management to “divide and conquer using high number of bases to divide pilots and pit [sic] them against each other” (refer to Appendix B, Q16, #4).

69 A pilot for a national airline blamed airline management to be “lying and breaking contracts” (refer to Appendix B, Q16, #6). Such a statement is an indicator that flag carriers are not immune against low-road employment relations. A Norwegian low-cost airline First Officer concluded that it is “becoming worse, [and he is] afraid about future relations and conditions” (refer to Appendix B, Q16, #2). Another important issue was brought up by a Norwegian low-cost airline Captain by stating that it is important for pilots to be “(…) able to make safest decisions not fearing job security as an employee” (refer to Appendix B, Q16, #3). This statement touches on a trend in the industry, that airline management monitors uplifting of extra fuel. In the case of Ryanair, Captains have to justify themselves if they take more fuel than what the company considers “sufficient” (Flightglobal.com, 2013). This practice increases the pressure on pilots to uplift less fuel, even though it is the Captain´s final decision from a legal perspective. The issue received major media attention, when several Ryanair airplanes had to declare fuel emergencies due to challenging weather (Aviation Herald, 2012).

The survey provided further insights into the direct relationship between pilots and management. The data shows how pilots rate their affiliation with managers, especially in terms of mutual trust. The latter is considered an important variable in connection with high-performance work systems, which are utilized to gain competitive advantage. Again, neutral answers were excluded from the percentage calculation.

Direct Relationship between pilots and senior management, Total Percentage irrespective of union-management relations (Q18) Answers Satisfactory 29 15.85 % Unsatisfactory 154 84.15 % Excluded Neutral Answers 39 / Senior management and employees trust each other (Q19) Agree 16 8.51 % Disagree 172 91.49 % Excluded Neutral Answers 34 / Employee-Management relations should be built on trust and mutual respect (Q20) Agree 209 96.31 % Disagree 8 3.69 % Excluded Neutral Answers 5 / Table 13: Pilots´ assessment of pilot-management relationships

70 3.3.8 Communication and Joint Decision-Making

Communication between senior leaders and employees is Total Answers Percentage good in my airline. (Q21) Agree 33 21.29 % Disagree 122 78.71 % Excluded Neutral Answers 67 / Availability of management to employees (Q22) Mostly Available 46 20.72 % Somewhat available 91 40.99 % Slightly Available 85 38.29 % Clear explanation of company´s business plans by management (Q23) More clearly 25 11.26 % Moderately clearly 60 27.03 % Less clearly 137 61.71 % Management listens to employees´ opinion when making decisions (Q24) Extremely often 0 0 % Very often 6 2.70 % Moderately often 21 9.46 % Slightly often 75 33.78 % Not at all often 120 54.05 % Pilots awareness of company´s goals, core values and current performance (Q25) Agree (Aware) 89 57.05 % Disagree (Unaware) 67 42.95 % Excluded Neutral Answers 66 / Pilot feedback provided to managers (Q26) Very often 19 8.56 % Moderately often 45 20.27 % Slightly often 58 26.13 % Not at all often 100 45.05 % Table 14: Communication and joint decision-making Table 14 reflects prevailing channels for communications to facilitate joint decision-making at European airlines. Next to mutual trust, increased levels of communications and joint decision-making are indicators for high-performance work systems.

71 Q22 and Q23 were slightly modified for data presentation in Table 14. The answer “always available” was joined together with “mostly available” and “not at all available” with “slightly available”. In Q23 survey answers “extremely clearly” and “very clearly” were combined into “more clearly”. The same applies to Q23 answers “slightly clearly” and “not at all clearly” which were summarized as “less clearly.” In Q26 “extremely often” was merged with “very often”.

3.3.9 Job Satisfaction and Effects on Operational Efficiency

Employment relations affect pilots´ individual job satisfaction Total Answers Percentage (Q17) Agree 191 91.39 % Disagree 18 8.61 % Excluded Neutral Answers 13 / Not being permanently employed by the airline itself, affects the pilots´ commitment at work13 (Q36) Agree 72 86.75 % Disagree 11 13.25 % Personal Job Satisfaction affects pilots´ motivation to reduce operating costs (Q34) Agree 170 85.00 % Disagree 30 15.00 % Excluded Neutral Answers 22 / Pilots apply “work-to-rule” concept, depending on they feel treated by their airline14 (Q33) Agree 130 68.42 % Disagree 60 31.58 % Excluded Neutral Answers 32 / Cost saving efforts of permanent pilots are affected if the airline utilizes contract pilots or is planning to do so15 (Q37) Yes 37 69.81 % No 16 30.19% Table 15: Effects of job satisfaction on operational efficiency

13 The question was only answered by contract pilots without permanent employment status and skipped by permanent pilots 14 Indirect indication of job satisfaction 15 The question was only answered by pilots who felt that this statement is applicable to their airline.

72 Table 15 above provides an overview of the collected data, which reflects the effects of employments relations on job satisfaction and in turn the pilots´ motivation to engage in operational saving practices. It is important to note that the majority of contract pilots specifically stated that their employment status as non-permanent employee affected their commitment at work. Commitment can be interpreted as motivation for “going the extra mile” in terms of operational efficiency.

3.3.10 Affected Areas of Operational Efficiency

Reduced levels of job satisfaction, motivation and commitment towards the company result in different pilot behaviors. The following tables present data concerning affected areas of operational efficiency.

Pilots are willing to work on their free days to help their Total Answers Percentage company (“crew flexibility”) (Q32) Agree (True) 45 26.16 % Disagree (False) 127 73.84 % Excluded Neutral Answers 50 / Table 16: Willingness to work on free days

Pilots who stated that their job satisfaction affects their motivation to save operational costs, where asked in which specific areas they would perform actions less efficiently (Q35 in the survey). The same question was asked again at a later stage during the survey (as Q38) to specifically address permanent pilots who felt less committed to their airline due to simultaneous utilization of contract pilots at their company. Unfortunately 62 pilots did not follow the survey instructions properly, which rendered the collected data for Q38 invalid. Therefore the author based the data analysis for specific operational saving areas solely on Q35. Table 17 provides an overview of the collected data. Next to predefined options, free text answers could be provided (refer to Appendix B, Q35).

73 To gain a better understanding of Table 17 below, the operational areas are explained in detail first:

Area 1 – Inflight Route Management:

Pilots have the option to directly engage with Air Traffic Control and ask if shorter routings (“directs”) are available. If a direct is granted, it saves flight time and fuel.

Area 2 – On-Time-Performance:

If pilots arrive ahead of their scheduled check-in time, they have more time available to thoroughly prepare the flight and arrive earlier at the aircraft. Therefore, it is more likely that the flight will leave on time. If pilots proactively manage turnarounds between flights, the likelihood for on-time departures is increased. Being proactive by submitting fuel pre- orders for the next flight and by relaying instructions to ground personnel whilst still airborne accelerates the turnaround process.

Area 3 – Economy Fuel:

Airlines utilize databases that constantly monitor fuel prices at all destinations. If the local fuel price is essentially lower at one station compared to the next destination, it might be cheaper to uplift more fuel to cover the next flight. Some airlines provide their pilots with a “tankering” recommendation on the flight plan to make them aware of this special situation. Now it is up to the pilots to decide if they are going to follow this recommendation or not, thereby saving costs.

Area 4 – APU usage:

The Auxiliary Power Union (APU) is an extra turbine, which provides electricity and conditioned air, when the aircraft is on the ground with the engines shut down. It draws fuel from the same tank as the main aircraft engines. If pilots start it too early or let it run longer than required, unnecessary costs are generated.

Area 5 – Speed Adjustments:

Pilots have the option to fly faster to catch up any earlier delay or slow down if any airborne delay (flying holding patterns) is expected at destination. Holding at lower altitude requires more fuel, than flying slower at higher altitudes. Flying faster might help connecting passengers to reach their next flight. Hence, the airline might save costs associated with passenger accommodation due to missed connections.

74 Area 6 – Extra Fuel:

If pilots are willing to make the extra effort, they can calculate requirements for extra fuel more accurately. This area is also connected with area 2. If pilots arrive ahead of their check-in time, they have more time available to accomplish this task.

Area 7 – Low Drag Approaches:

A Low Drag approach requires more precise descent planning, as the pilot aims to descent towards the destination airport as long as possible with the engines at idle thrust. By extending flaps and gear at a later stage, these approaches save more fuel than conservative approaches where the airplane flies a longer distance with gear and flaps extended. Depending on the aircraft type, low drag approaches can save on average between 50-100kg of fuel per approach. For example, Lufthansa had 12.853 flights planned per week in the summer of 2010 (Lufthansa, 2010). The result is approximately 642 tons of fuel saving in only one week, based on the lower value of 50kg saving per flight. At an assumed fuel price of $120,- USD per ton, the financial saving would result in $77.040 USD in one week if pilots performed low drag approaches on all flights.

Area 8 – Vertical profile adjustments:

Each flight is planned at specific altitudes based on weather forecasts and air traffic control requirements. Once airborne, pilots can optimize their flight by adjusting their altitude based on actual winds and temperatures. Additionally it might be possible to negotiate a specific flight level with ATC, which was not available during the planning phase. All these measures can result in fuel and time savings.

Area 9 – Pre-Flight Planning:

Already during the planning phase, pilots have to option to optimize their planned flight in cooperation with airline dispatchers. As mentioned earlier, planned cruising altitudes can ultimately be changed in the air with consent of air traffic control. However, if pilots manage to optimize these levels already during the planning phase, the minimum required fuel for a flight could be reduced. Thus, overall fuel burn could be decreased due to a lower take-off weight. Some airlines already utilized specialized flight planning software to perform this task. Therefore, this option is more interesting for pilots at airlines without this software solution.

75 Another option to reduce the minimum required fuel is to evaluate if the flight could depart without alternate airport. Normally each flight legally requires an “alternate”, in the event that it is not possible to land at the destination due to weather or other reasons. Under specific conditions (good weather conditions, several independent runways available at destination amongst others), pilots are allowed to dispatch without alternate airport. Thus, the flight does not have to carry alternate fuel, resulting in a lower take-off weight and overall fuel savings.

Affected areas for possible operational cost savings (Q35) Total Answers Percentage 1) In-flight route management (willingness to ask for directs 113 67.26 % with ATC) 2) Being mindful of on-time performance (willingness to 102 60.71 % arrive ahead of checkin time, turnaround coordination) 3) Paying attention to economy fuel ("tankering") 82 48.81 % 4) Considerate APU usage 80 47.62 % 5) Speed adjustments to cater for delays 80 47.62 % (using variable cost index / speeds) 6) Considerate uplifting of extra fuel 74 44.05 % 7) Willingness to perform low drag approaches 64 38.10 % 8) Vertical profile adjustments (step climb / descent) 63 37.50 % 9) Pre-Flight Planning (willingness to improve routes for wind 38 22.62 % profiles, planning without alternate if possible) Other (free text) 10 5.95 % Question skipped by participants 54 / Table 17: Operational Efficiency: Affected Areas

3.4 Data Analysis

The data was analyzed with quantitative research tools, which were provided by survey monkey´s online platform in terms of filters and comparators that could be applied to the data. Outsourcing is directly related to the utilization of contract pilots by airlines. Filters were used to split up data sets to distinguish between permanent- and contract pilots. The following data sets of the survey were separated between permanent- and contract pilots: Q12, Q13, Q14, Q15, Q16, Q17, Q18, Q33, Q34, Q35, Q36, Q37 and Q39. All figures of these questions can be found in the Appendix A as only the most significant ones are presented within the text of Chapter Four.

76 4 Discussion of Findings

In this chapter the findings of the survey are discussed in relation to the research question “which effect does outsourcing have on employment relations in European Airlines and how does it effect operational efficiency efforts of pilots, thus leading to an impact on competitive advantage?” The data was approached in sequence of the sub-questions. All figures in this chapter represent the author´s own work.

4.1 Effects of Outsourcing on Employment Relations

Sub-Question (a) “How does outsourcing affect employment relations?” was addressed in the survey via several questions. Related factors that mirror the state of employment relations were analyzed. These factors included satisfaction of pilots with their company´s culture, their working environment and the prevailing type of union-management- and pilot- management relations. In terms of company culture (Q12), the majority of both permanent- (55.8%) and contract pilots (51.4%) were not satisfied. The interesting factor was that permanent pilots were dissatisfied by greater extent concerning their companies´ cultures compared to their contract colleagues. Once the data of Q12 was put into context with Q37 it made perfect sense.

Figure 5: Effect of outsourcing on permanent pilots (Q37)

77 Q37 confronted permanent pilots with the scenario of how they would feel if their airline utilized contract pilots instead of permanent pilots. The data revealed that permanent pilots would lose commitment towards their employer as soon as the airline anticipated outsourcing of permanent pilot positions.

The majority of permanent pilots (25.7%) clearly stated that their commitment towards their airlines was affected in connection with outsourcing attempts. This impact is especially interesting in terms of operational cost saving efforts, which are addressed through sub- question (c).

As discussed earlier, a clear indicator for the overall level of employment relations in companies can be found in the way of how management is dealing with unions (Q15). The data generated through Q15 revealed that especially in airlines with contract pilots, management had ambitions to control and avoid unions. In turn, the result was a negative impact on employment relations. Therefore, it is fair to argue that airlines with higher levels of outsourcing have the tendency to control their unions in order to limit their influence on managerial decisions. Control and avoidance in itself represent the toughest approach towards unions and is more likely to be found in low-cost carriers. Ryanair is the classic example for this practice as approximately 70% of its pilots are non-permanent, contract pilots (Ryanair Pilot Group, 2014). Network carriers, on the other hand, tend to create subsidiaries with permanent pilots instead. This trend is reflected in the survey data as all other union relations, except control and avoidance, were utilized in airlines with greater levels of permanent pilots.

78 Figure 6: Union-Management Relations (Q15)

Irrespectively of union-management relations, the overwhelming majority of all pilots considered the direct relationship between pilots and management to be unsatisfactory (Q18).

Figure 7: Pilot-Management Relations (Q18)

79 Combining these findings, all hypotheses based on sub-question (a) concerning the effects of outsourcing on employment relations can be confirmed: The outsourcing of pilot positions has a negative impact on employment relations (a1), especially in terms of pilot- management relations (a2). In companies that utilized outsourcing, the tendency to control and avoid unions (a3) could be observed.

4.2 Employment Relations based on Employment Status

Earlier research concerning employment relations in airlines has been based on the relationship between unions and management (Bamber et al., 2009; Boyd, 2001; Cappelli, 1985). Consequently, the target group only consisted of permanent pilots. The research for the Master Thesis analyzed the effects of utilizing contract pilots as a form of outsourcing and its effects on employment relations between pilots and management. Research sub- question (b) was directed at this particular area: “How do employment relations effect individual groups of pilots based on their employment status?” The survey addressed various employment methods through questions Q16, Q17, Q36 and Q39. In order to understand how different pilot groups view employment relations in general, Q16 asked the participants to select the terms that each pilot personally associated with employment relations. Permanent pilots put greater emphasis on nearly all terms, except three areas (mutual trust, union suppression, management by fear). Especially “management-by-fear” was associated with employment relations by 21,3% of contract pilots compared to 14,5% of their permanent colleagues. Hence, it can be argued that contract pilots are working in airlines where a tendency towards “management-by-fear” exists. The gathered data was split again between permanent and contract pilots in order to draw connections between employment status and employment relations. Figure 8 below depicts the findings.

80 Figure 8: Pilot associated terms with employment relations (Q16)

Hypothesis (b2), presuming that contract pilot are more affected by employment relations, was confirmed by Q17 (Figure 9 below) which was considered a key finding: Contract pilots were more sensitive to employment relations in terms of job satisfaction (95,7%) compared to permanent pilots (90.6%). The large impact on both groups (>90%), confirmed hypothesis (b1) that employment relations significantly affect job satisfaction of pilots.

Figure 9: Influence of employment relations on job satisfaction (Q17)

81 The final proof that employment status effects employment relations was provided by Q36. The majority of contract pilots (79,2%) confirmed hypothesis (b3): Not being permanently employed, affected their commitment at work. Surprisingly, also permanent pilots answered this question. Therefore, should airlines continue to outsource permanent pilot positions, permanent pilots are likely to be negatively effected in their commitment towards the company as well.

Figure 10: Commitment of pilots at work versus employment status (Q36)

Another indicator linked to the quality of employment relations can be found in levels of employee retention. High levels of employee turnover are considered an indicator for “low- road” employment relations. Since it was not possible to receive data on employee turnover from airlines directly, the survey raised this data by asking pilots how likely they were to search for a new job in the near future. The data revealed that especially contract pilots were actively looking for new opportunities (27.1%) compared to only 9.4% of permanent pilots. One the other hand, the majority of permanent pilots (40.4%) were not likely at all to search for a new job (Q39).

82 Figure 11: Pilots´ ambitions to pursue new job opportunities (Q39)

The gathered data confirmed hypothesis (a1) that outsourcing has a negative influence on pilots. Especially being a contract pilot had a negative effect on job satisfaction and associated commitment at work. Permanently employed pilots were affected as well but on a lower level. The data revealed a trend that already the possibility of outsourcing carries the risk of degradation in employment relations between permanent pilots and their companies.

4.3 Employment Relations and possible effects on Operational Efficiency

Sub-question (c) investigates how operational efficiency was affected by employment relations. As the collected data has shown, employment status affected the quality of employment relations between pilots and their airlines. Especially contract pilots displayed reduced levels of commitment towards their airlines as a result of being employed through external crew leasing agencies. The survey data was able to confirm the hypothesis (c1) that job satisfaction affected the pilots in their efforts to save operational costs as Figure 12 below clearly shows.

83 Figure 12: Pilots´ job satisfaction versus operational cost saving efforts (Q34)

Both permanent- and contract pilots confirmed hypothesis (c1) that reduced levels of job satisfaction have led to lower operational cost saving efforts on their behalf. Again, the data acknowledged the fact that outsourcing is likely to result in an increase in operational opportunity costs due to reduced efforts for operational efficiency by pilot groups. A greater percentage of contract pilots (88.4%) was affected compared to permanent pilots (83.8%). Employment conditions as contract pilot are probably the driving factor in this context. Therefore, an outsourced pilot is less likely to engage in operational saving efforts, which confirmed hypothesis (c2). Additionally the “work-to-rule” concept was evaluated. Normally unions call upon their members to apply this concept as bargaining chip on management during contract negotiations. As it has been discussed earlier, airlines depend on their pilots to be flexible and to operate as efficiently as possible. Hence, the “work-to-rule” concept can be considered as an intentional countermeasure to operational saving ambitions. Figure 13 reveals that both pilot groups utilized the work-to-rule concept, based on their individual perception of prevailing employment relations. Based on the collected data, contract pilots in particular (an additional 13.6% compared to permanent pilots) applied the work-to-rule concept to express their contempt with prevailing employment relations. This difference of +13.6% confirmed hypothesis (c3) that low road employment relations lead to reduced saving efforts.

84 Figure 13: Work-to-Rule concept versus perceived employment relations (Q33)

4.4 Operational Efficiency: Affected Areas

In order to identify which areas were affected by reduced saving efforts of pilots in particular, Figure 14 provides an overview. The data was split between both pilot groups to allow better comparisons between them.

Figure 14: Operational Efficiency: Affected Areas (Q35)

85 In the majority of the areas, both groups were balanced in their actions (within 5% of each other). The largest difference could be observed in performing low drag approaches, uplifting of extra fuel and during pre-flight planning. Figure 14 has to be examined in connection with the meaning of each operational area as it has been described in section 3.3.10 earlier. When looking at low drag approaches, an additional 23% of the contract pilots choose not to perform them, which resulted in a higher fuel burn for their airlines. On the other hand, additional 15.2% of permanent pilots choose to uplift extra fuel, thus increasing fuel burn because of increased aircraft weight. These two areas are very interesting as it shows that pilots were well aware of monitoring systems and how they adopted their actions accordingly. In low-cost airlines, uplifting of extra fuel is monitored rigorously, and if pilots choose to tanker more fuel than the company recommends, a written explanation has to be provided. For legacy carriers, this is not the case as the pilot union would normally brand these practices as threats to flight safety. On the other hand, pilots at low-cost airlines can easily perform approaches in a conservative way (the opposite to a low drag approach), since it is harder to prove for their managers that this has been done deliberately, as external factors such as other traffic might have required those actions. The difference during the pre-planning phase (+9.4% permanent pilots) is also linked to the monitoring of extra fuel. In network carriers, pilots do not have to worry about uplifting of extra fuel. Contract pilots, on the other hand, are not very likely to reduce the minimum required fuel even further by pre-planning without an alternate airport (= alternate fuel). They rather plan with an alternate airport, even though they could plan the flight without it, if legal requirements (e.g. good weather at destination, more than one runway available) are met. By considering the alternate fuel as extra fuel, contract pilots build themselves an additional margin for unforeseen circumstances, which is not monitored by management. Hypothesis (c4) was confirmed as inflight-fuel management had the greatest impact on operational savings, followed by on-time-performance.

86 5 Conclusions

The findings of the survey revealed that outsourcing of permanent pilot positions led to a deterioration in employment relations in European airlines, both on union-management and pilot-management levels. Pilots rated open communications and mutual trust as very important, but in both areas managers fell short of the pilots´ expectations. Therefore, it was no surprise that the direct pilots-management relationship was valued as unsatisfactory by over 80% of the pilots. The majority of pilots considered communications to be unsatisfactory as business plans were not explained sufficiently to the flying workforce, thus missing out the opportunity to provide overall guidelines to flight crews for daily operational decisions in line with corporate goals. Only if employees are aware of long-term goals, they can act accordingly. Pilots also expressed their desire to get involved in business related decision making, but this wish was not honored by management. As a consequence pilots did not bother to provide operational feedback either. All these factors can be summarized within the term “employment relations” between pilots and airline management. Pilots are directly affected by the quality of these relations. The fact that they are not permanently employed by their airlines played an important role for contact pilots and led to reduced commitment levels towards their carriers. At the same time, permanent pilots were concerned about utilization of non-permanent pilots as it represented a threat to their employment conditions. Hence, both pilot groups were subject to lower levels of motivation and job satisfaction, which resulted in limited participation of pilots in operational saving initiatives. Moreover, low-road employment relations directly translated into counterproductive actions in terms of work-to-rule practices with increased opportunity costs for airlines.

5.1 Theoretical Implications

This study is able to contribute to existing research in employment relations. By providing evidence that employment relations in the airline industry are affected by the utilization of contract pilots, it establishes contract pilots in the field of outsourcing as another variable which has an impact on competitive advantage for airlines. Therefore, research in employment relations in the airline industry should not be limited to union-management relations only. Instead, it should be extended to include contract pilots, who are not directly employed by airlines.

87 5.2 Managerial Implications for Airlines

Already faced with high fixed costs, airlines with prevailing low-road employment relations risk an increase in variable costs as pilots have the greatest influence on fuel that happens to be the largest operational cost item for airlines in general. If pilots do not operate as efficiently as possible, airlines risk an increase of their opportunity costs in terms of lost fuel savings. The same applies to on-time performance as pilots play a critical role in achieving high levels of punctuality. Airlines that give in the temptation of short-sighted labor cost savings by outsourcing permanent pilots to external crew leasing agencies run the risk of losing competitive advantage in terms of fuel costs and on-time performance.

On the other hand, airlines that treat their pilots as an asset compared to an outsourceable fixed cost item, are likely to enjoy long-term benefits in terms of greater employee loyalty, productivity and efficiency. Earlier research has shown that high-performance work systems can be used to convert employees into valuable resources (D. J. Collis & Montgomery, 2008; J. Pfeffer & Veiga, 1999; J. Pfeffer, 2005). These systems are based on job security, communication, employee empowerment and improved work-life balance and are not established overnight as their implementation takes times. Thus, they are harder to copy for competitors . The pilots of Southwest Airlines can be considered such a valuable resource. Southwest´s 41 consecutive years of profitability can be seen as an indicator that “competitive advantage through people” works well in the airline industry. The evidence of the survey together with the real-life example of Southwest Airlines suggest that high-performance work systems and high-road employment relations are realistic options to improve competitive advantage in the airline industry (Freiberg & Freiberg, 1996; Gittell, 2003; Harvey & Turnbull, 2010b; Southwest Airlines, 2014; Stork, 2014).

88 5.3 Utilizing Employment Relations to improve Competitive Advantage

Airlines regularly compete on price, irrespectively of their chosen business models, as there is little room for product differentiation. Consequently, instead of focussing on outsourcing as primary cost reduction measure, managers should consider investing in their people as primary “operational cost saving representatives.” The collected data of the survey confirmed that pilots are willing to contribute to the overall success of their airlines in terms of efficiency, flexibility and operational decision-making. In order to tap into this powerful resource managers need to approach pilots with greater levels of trust and respect. Communicating corporate goals more clearly allows pilots to participate in joint problem-solving. The expenses for increased levels of collaboration do not have to be higher than current costs for salaries as the majority of pilots were satisfied with their actual remuneration according to the survey results. Instead, it would be sufficient to provide long-term, secure positions for all pilots without dividing them into different groups of contract and permanent employees. Additionally the implementation of associated high- performance work systems has been proven to increase levels of cooperation with the ultimate goal of gaining competitive advantage. In an industry where differentiation is already very difficult, these combined measures could be the solution to stand out from the competition.

89 5.4 Limitations and Future Research

The research at hand was highly dependent on sufficient survey participants. The lacking interest of European pilot unions to participate in the survey was not expected. Only through utilizing the author´s professional network, it was possible to distribute the survey to a sufficient amount of professional airline pilots. Ultimately 266 primary data sets were received, out of which 222 were usable. Therefore, the lack of interest from pilot unions could present a topic for future research in the area of employment relations in the airline industry.

Even though only European airline pilots participated in this study, the results are likely to be valid for other carriers in different regions of the world. Especially in Asia the demand for experienced expatriate pilots is high. Pilots for Asian airlines are frequently hired through contract agencies. It is not the only region of the world which is lacking local, experienced pilots to fill the cockpit seats. Hence, all airlines worldwide could benefit from reviewing their constant practices of outsourcing pilots to external providers. Rutner and Brown seemed to be on the correct path already in 1999, when they concluded that airlines should keep their core competencies for success in house (Rutner & Brown, 1999).

6 Summary

After providing an overview of the airline industry cost structure, the Master Thesis reviewed the principles of competitive advantage and their influence on the airline industry. Emphasis has been placed on the fact that management primarily targets expenses for labour to achieve lower fixed costs even though pilots have the greatest influence on operational costs drivers such as fuel and on-time performance. The Master Thesis has proved that outsourcing of pilot positions had a negative effect on employment relations in association with permanent pilots and their unions on one hand and contract pilots on the other hand. The consequence has constituted itself in an increase in operational opportunity costs for airlines, as pilots did not engage in operational saving efforts but reverted to work-to-rule practices instead. Consequently, the effectiveness of outsourcing pilot positions to reduce fixed costs is questionable in the background of these findings. Instead, managers should consider the implementation of high-performance work systems to establish their pilots as valuable resources to improve competitive advantage for their airlines.

90 7 Appendix A – Survey Findings: Figures

These figures were created by the author from filtered survey data, which was analyzed through Microsoft Excel to enable easier comparisons between data sets.

Q12 Workplace Satisfaction

Q13 Airline Working Environment

91 Q14 Airline Brand Perception of Pilots

Q15 Union-Management Relations

92 Q16 Pilot associated terms with Employment Relations

Q17 Influence of Employment Relations on Job Satisfaction

93 Q18 Pilot - Management Relations

Q33 Work-to-Rule concept versus perceived employment relations

94 Q34 Pilots´ job satisfaction versus operational cost saving efforts

Q35 Operational Efficiency: Affected Areas

95 Q36 Commitment at work versus employment status

Q37 Effect of outsourcing on permanent pilots

96 Q 39 Pilots´ ambitions to pursue new job opportunities

97 8 Appendix B – Survey Data: Summary of Data Sets

The summarized survey data is comprised of 222 completed survey data sets. 47 only partially completed data sets are not included. The data is presented in form of individual questions. The summary format of surveymonkey.com was used for data presentation. As mentioned earlier, the last question was removed for data protection purposes. Hence, Appendix B has individual page numbers 1-39 and pages 40-42 are not provided.

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